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HMRC internal manual

Corporate Finance Manual

CFM95410 Interest restriction

TIOPA10/S480, S483, S484, S485, S486

The calculations under the fixed ratio method and the group ratio method need to be performed by reference to the worldwide group’s period of account. It is therefore necessary to establish the group’s period of account before these calculations can be undertaken.

The period of account might be obvious, for example if the group prepares financial statements. However, it is not as simple as this in all cases, and so there are also provisions for groups that have not drawn up consolidated financial statements for the worldwide group’s period of account. It is not unusual for this to be the case where one group of companies takes over another.

The period of account for the Corporate Interest Restriction can be determined by working through the steps below. If the answer to a question is sufficient to define the period of account no further steps would normally need be considered and this is the period that should be used.

The one exception to this is where there is a change in the ultimate parent part way through the period for which the consolidated accounts are drawn up.

STEP ONE: Does the ultimate parent prepare financial statements for the group for a period throughout which it was the group’s ultimate parent?

If the ultimate parent does draw up financial statements for the group and was the ultimate parent of the group during all of the period for which the financial statements are drawn up, then the period covered by these accounts is taken as the worldwide group’s period of account (S480(a)).

This is the default rule, but it does not apply where the accounts are for a period exceeding 18 months in duration or are drawn up more than 30 months after the start of the period (S487).

STEP TWO: Does the ultimate parent prepare its own financial statements for a period throughout which it was the group’s ultimate parent?

If the ultimate parent of a multi-company group fails to draw up financial statements for the group, but does draw up financial statements for itself, then the period of account used to produce these single entity accounts is taken as the worldwide group’s period of account (S484). Again, this is only the case where the company is the ultimate parent throughout all of the period for which the financial statements are drawn up.

Note that the ultimate parent can elect that this rule does not apply. The election is irrevocable and has effect in respect of periods ending on or after the date specified in the election. This cannot be before the date on which the election is made, although there are extended time limits in the first year of the rules.

STEP THREE: Do no such financial statements exist?

If the ultimate parent does not draw up consolidated financial statements for the worldwide group, for a period during the whole of which it was the worldwide group’s ultimate parent and step two does not apply, then the group can either:

·       use the default period of accounts for the accounts-free period as prescribed by the rules (S485), or

·       make an election to override the default treatment and specify the period of account (S486).

Note that this will be case if a company was the ultimate parent of the group for only part of the period for which it draws up the single entity financial statements. This is a relatively common scenario: if the ultimate parent of one group becomes as subsidiary in a different worldwide group as a result of a takeover, it is likely to draw up only single entity accounts, which may cover a period of account overlapping the date of the takeover. Where this is the case, the period beginning the day after the end of group’s previous period of account and ending on the date of the takeover will be an accounts-free period.