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HMRC internal manual

Corporate Finance Manual

Interest restriction: tax-EBITDA: disregarded periods

TIOPA/S406(5)-(7)

The object of the calculations is to arrive at an aggregate tax-EBITDA figure for a particular period of account for a worldwide 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’. These are periods which:

  • Fall outside the group’s period of account.
  • Relate to a time during which the company was not a member of the group.

Where either of these circumstances apply, the amounts to be included in adjusted corporation tax earnings are reduced on a just and reasonable basis to exclude these periods. This can result in a reduction to nil.

This corresponds to the same issue of disregarded periods addressed in relation to the calculation of tax-interest.

Example 1

A company has an accounting period for the year ended 31 December 2017. It is a member of a group that has a period of account for the year ended 31 March 2018. Only the amounts attributable to the last nine months of the accounting period for the company will be included in calculating the adjusted corporation tax earnings for the group’s period of account.

Example 2

A company has an accounting period for the year ended 31 March 2018. It is a member of a group that has a period of account for the year ended 31 March 2018. However, the company leaves the group on 1 March 2018. Therefore only amounts attributable to the first 11 months of the accounting period for company will be included in calculating the adjusted corporations tax earnings for the group’s period of account.

Meaning of just and reasonable basis

What ‘just and reasonable basis’ means in practice will depend on the particular facts and circumstances.

It should be noted that the concept of adjusted corporation tax earnings is based on the amounts that are brought into account for tax. Therefore it would be expected that significant consideration will be given to when an item would typically be brought into account for tax purposes.

Accordingly the UTT supplementary ring-fence profits charge case of HMRC v Total E&P North Sea Ltd (UT/2018/0039) does not set applicable precedent. Thus, while a time apportionment approach would be acceptable so long it does not lead to a distorted result, the computation of the actual figure of tax-EBITDA for each period would not be rejected on the grounds of going further than was necessary. Equally, a reasonable approximation should be acceptable.

So in particular consideration should be given to:

  • The period in which amounts would be recognised in the company’s financial statements if they were drawn up for particular periods.
  • The period in which amounts would be brought into account by the company if it had a different accounting period.
  • Ensuring that the amounts are in total fully attributed. In other words, if the accounting period is broken up into a number of periods which do not overlap and which, taken together, completely align with the accounting period in question, the total of the amounts attributed to those periods must equal the amount being attributed.

Example 3

A trading company or property business accrues profits evenly throughout the year. As a result, a simple time apportionment is likely to be appropriate for attributing the taxable profits of the company to a part of an accounting period.

Example 4

A company makes a net chargeable gain of a disposal of an asset in an accounting period. This net chargeable gain would be attributable to the part of the period in which the disposal took place. Because the concept of adjusted corporation tax earnings is based on the inclusion of chargeable gains after the deduction of allowable losses, no attempt should be made to split out a net chargeable gain into the gross gain and allowable loss.

Example 5

A company makes a pension contribution in a period in line with previous periods. The deduction would be attributable to the part of the period in which the pension contribution was paid.

Example 6

A company makes an abnormally large pension contribution, such that an excess amount is being spread over four years. That spreading would be applied for attributing the amount of the deduction for the excess amount to a part of an accounting period.

Administration

Where there is an enquiry into the Corporate Interest Restriction figures which involves a dispute over the just and reasonable basis, HMRC may make a determination of the just and reasonable basis to be used as part of process of closing the enquiry. The reporting company may appeal against the determination on the basis that the attribution is not just and reasonable.