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HMRC internal manual

Corporate Finance Manual

Interest restriction: tax-EBITDA: overview

TIOPA10/PART10/CH6

The Corporate Interest Restriction operates to provide interest allowances based on the aggregate amount of ‘tax-EBITDA’ of the worldwide group for the period of account.

This is a measure that is specifically defined in the rules and represents the UK taxable earnings for the group, before taking account of deductions for interest, capital allowances (the tax equivalent of ‘depreciation’) and amortisation. A number of other specific items are also adjusted for in accordance with the legislation.

Background

‘EBITDA’ - Earnings before Interest, Tax, Depreciation and Amortisation – is a common concept, frequently employed in commercial loan agreements to measure the performance of the borrower year on year. It represents an attempt to move closer to a cash measure, rather than an accounting one, by removing major non-cash deductions from the figure of earnings.

The use of tax-EBITDA is based on this commercial concept, but it is distinct. In particular, because it is measuring the activity that is within the scope of UK corporation tax, only taxable profits and losses are included.

Definitions

Tax-EBITDA is concept defined in Chapter 6 of Part 10 of TIOPA 10 in relation to the Corporate Interest Restriction legislation and is intended to represent income that is subject to tax in the UK.

{#}Aggregate tax-EBITDA

The statutory definition of the aggregate tax-EBITDA for the group for a period of account is at TIOPA10/S405. This is defined as the total of the tax-EBITDA of each company that was a member of the group at any point in the period of account.

The tax-EBITDA of a company can be a negative amount. However, where the total of amounts for all of the companies is negative, the amount of aggregate tax-EBITDA is taken to be nil.

{#}Tax-EBITDA of a company

The statutory definition of tax-EBITDA for a company in relation to a group’s period of account is at TIOPA/S406(1). This based on the amounts of adjusted corporation tax earnings of the company that are attributable to the group’s period of account. Note that if a company is not a UK group company, no amounts are brought into account for corporation tax, so its tax-EBITDA must be zero.

Where there is just a single relevant accounting period of the company for the group’s period of account, the tax-EBITDA of the company is simply the adjusted corporation tax earnings for the relevant accounting period.

  • Where, however, there is more than one such period, the tax-EBITDA of the company is the sum of adjusted corporation tax earnings for each one.
  • The object of the calculations is to arrive at an aggregate tax-EBITDA figure for a particular period of account of a group. As a result, only amounts from a relevant accounting period that are attributable to the group’s period of account are included in the adjusted corporation tax earnings of the company for the period of account. It is therefore necessary to adjust for any disregarded periods which occur where:
  • A relevant accounting period of a company in the group falls partly outside of the group’s period of account, or

The company joins or leaves the group part way through the group’s period of account.