CFM95230 - The fixed ratio method

TIOPA10/S397

Of the two methods applied in computing the basic interest allowance of the worldwide group for a period of account, the simpler method used by default, is the fixed ratio method.

Applying this method, the basic interest allowance is the lower of:

  • a fixed percentage (30%) of the worldwide group's aggregate tax‑EBITDA; and
  • the fixed ratio debt cap for the period.

Aggregate tax-EBITDA

The tax-EBITDA of a company is a measure of its earnings before interest, tax, depreciation and amortisation, but computed according to corporation tax rules. The amounts for the UK group companies that were members of the worldwide group at any time in the period of account are aggregated to produce the aggregate tax-EBITDA of a worldwide group for a period of account. The tax-EBITDA of a company may be negative, but where the sum of these amounts is negative, the group is treated as having tax-EBITDA of zero. As with aggregate tax-interest, there are rules dealing with disregarded periods where company accounting periods do not coincide with the group's period of account, or a company joins or leaves a group part way through a period.

The fixed ratio debt cap

The debt cap taken into account under the fixed ratio method is a measure of the entire worldwide group's net external interest expense. It is an accounting-based measure.

The first stage in computing this limit is calculation of the worldwide group's net group-interest expense from accounting data. This comprises amounts of interest and similar financing expense or income that are included within the profit or loss in the group's financial statements. The specific categories of income and expense which fall within net group-interest expense are set out in the legislation.

The measure of external interest expense used to compute the fixed ratio debt cap is the adjusted net group-interest expense of the group (ANGIE). This is computed by making specific upwards and downwards adjustments to the net group-interest expense of the group for the period of account. These adjustments align the measure more closely with the type and timing of amounts included in net tax-interest.

The fixed ratio debt cap is the sum of the ANGIE and any excess debt cap brought forward from the previous period.

Simple examples

In a simple case where no amounts are brought forward and the de minimis amount is not relevant, the group's interest restriction if any, will be:

  • The aggregate net tax-interest expense for the worldwide group

less the lower of:

  • 30% of the worldwide group's aggregate tax-EBITDA; and
  • the fixed ratio debt cap for the period of account.

Example A

  • (A) - Aggregate net tax interest expense = 25
  • (B) - Aggregate tax-EBITDA = 100
  • (C) - 30% of aggregate tax-EBITDA - (B x 30%) = 30
  • (D) - Fixed ratio debt cap (ANGIE) =150
  • (E) - Basic interest allowance ( lower of C or D) = 30

Restriction = (A-E) = nil

Basic interest allowance not used = (E-A) = 5

There is unused allowance of 5 as the worldwide group's basic interest allowance exceeds its aggregate net tax-interest expense by that amount. This amount can be carried forward.

Example B

  • (A) - Aggregate net tax-interest expense = 50
  • (B) - Aggregate tax-EBITDA = 100
  • (C) - 30% of aggregate tax-EBITDA = (B x 30%) = 30
  • (D) - Fixed ratio debt cap ( ANGIE) = 150
  • (E) - Basic interest allowance ( lower of C or D) =30

Restriction = (A-E) =20

Basic interest allowance not used = (E-A) = nil