This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Finance Manual

Interest restriction: tax-EBITDA: Adjusted Corporation Tax Earnings

TIOPA10/S406, S407

The adjusted corporation tax earnings is the taxable profit or loss of a company for an accounting period adjusted for certain items. These amounts are aggregated to derive the tax-EBITDA of a company for a group’s period of account.

It is based on the sum of two amounts:

  • Condition A amounts are brought into account when determining taxable total profits of the period; and
  • Condition B amounts are amounts which would have been brought into account in determining taxable profits for the period had there been sufficient profits.

Condition B is included to ensure all profits and losses are included in the calculation of the adjusted corporation tax earnings for the accounting period.

Note that the adjusted corporation tax earnings can be a negative amount, representing a loss for the period (taking account of the adjustments explained below).

Adjustments

  • In calculating the adjusted corporation tax earnings of the company for an accounting period certain adjustments are made. These operate to exclude amounts which would otherwise be included as Condition A or Condition B amounts.

The excluded amounts are outlined in s407(1). They comprise three types of adjustment.

Firstly amounts are excluded to calculate the taxable profit (or loss) before Interest, Depreciation and Amortisation. These consist of:

  • Any tax-interest income or expense amounts.
  • Any capital allowances or balancing charges under CAA2001.
  • Any {excluded relevant intangibles debit or credit}.

Secondly, amounts are excluded where they consist of losses arising in another group company or from another accounting period. There are, however, two exceptions to this:

  • The exclusion for losses made outside the relevant accounting periods does not apply to capital losses under TCGA1992. Capital losses are, however, excluded from Condition B amounts. This means that capital losses are included only to the extent they are deducted from chargeable gains.
  • The exclusion for group relief / consortium relief (including losses brought forward and surrendered under CTA10/S188CK), does not extend to any claim of group relief / consortium relief that is attributable to losses that arose while the company was not part of the group.

Finally, the effect of certain qualifying tax reliefs are also excluded to ensure that the Corporate Interest Restriction does not diminish the effect of those regimes.

Specific rules also follow for dealing with leasing transactions and the effect of double taxation relief.

Disregarded periods

  • It is necessary to adjust the amounts included within adjusted corporation tax earnings 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.