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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: interaction with other rules: late payment of interest - transitional provision

Interest and discount accruing before 1 January 2010

The debt cap rules contain provision at TIOPA10/SCH9/PARA32 that certain amounts that accrued before the 1 January 2010 cannot be financing expense amounts under TIOPA10/S313.

Under TIOPA10/S329 the tested expense amount is the sum of the net financing deductions of each relevant group company. Net financing deductions will include trading or non-trading loan relationship debits brought into account in a relevant accounting period. There are four legislative provisions which could result in amounts that accrued before the debt cap came into force being brought into account in a period after commencement and included in the tested expense amount. These are:

  • CTA09/S373 which provides that where there is a connection between a debtor and a creditor and amounts of interest are paid more than 12 months after the end of the period in which they accrue then, under certain circumstances, they cannot be brought into account until the accounting period in which they are paid.
  • CTA09/S407 which provides that in certain circumstances where there is a connection between a debtor and creditor in respect of a deeply discounted security any discount arising thereon cannot be brought into account until the security is redeemed.
  • CTA09/S409 which provides that a discount arising in respect of a deeply discounted security issued by a close company cannot be brought into account until the security is redeemed where the security has been issued to certain connected persons.
  • Regulation 3A of the Loan Relationships and Derivative Contract (Change of Accounting Practice) Regulations 2004 (SI 2004/3271) which provides for adjustments made on the transition from UK GAAP to IAS to be spread over 10 years from the later of the first accounting period beginning after 1 January 2006 or the accounting period in which the transition to IAS is made.

TIOPA10/SCH9/PARA32 prevents an amount that, but for any of the above provisions, would have been brought into account before 1 January 2010 from being a financing expense amount and therefore from being included in the computation of the tested expense amount.

TIOPA10/SCH9/PARA32(3) excludes from financing income amounts that, but for regulation 3A of the Loan Relationships and Derivative Contract (Change of Accounting Practice) Regulations 2004 (SI 2004/3271) would have been brought into account before 1 January 2010.

CFM90170 has more about the debt cap commencement provisions, including an example of the transitional rule.