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HMRC internal manual

Corporate Finance Manual

Interest restriction: alternative calculations: interest allowance (alternative calculation) election: employers' pension contributions

TIOPA10/S424

The default approach for calculating group-interest and group-EBITDA is based closely on the amounts recognised in the group’s financial statements. Where, however, the group has made an interest allowance (alternative calculation) election certain adjustments are made to the default approach to align the calculations more closely with the UK tax rules. 

One such adjustment that is made under this election is that the amounts are included in respect of registered pension schemes are based on the tax relief available under the UK tax rules.

Background

The Corporation Tax rules in the UK contain special provision for the timing of deductions for contributions to a registered pension scheme.  In particular, a deduction for such contributions will normally only be given for the period in which the contribution is paid. In addition, special spreading rules apply where there is a significant increase in the level of employer contributions from one period to the next. 

Effect of the election

Under the interest allowance (alternative calculation) election, the pension numbers are adjusted by:

  • Removing any amounts from the group’s financial statements in respect of contributions made by an employer into a registered pension scheme; and
  • Instead reducing the group’s profit before tax by the total of relief available to the employers under the UK pension rules.

This will typically mean that group-EBITDA is calculated on a paid basis for pension contributions to a registered pension scheme rather than in line with accounting treatment.  It will also take account for the spreading rules where there has been a significant increase in the contributions made.

The election will not affect contributions and accounting entries in respect of non-UK pension schemes because these will not be registered schemes.

Example

A group has two UK companies, P Ltd and Q Ltd.  The group has a registered pension scheme, a defined benefit scheme, in respect of which P Ltd and Q Ltd both contribute.

In calculating the group-EBITDA figure for the group:

  • Any amounts in respect of contributions to the registered pension scheme should be removed. This will include the pension costs recognised as part of staff costs and the net interest costs recognised in financial income and costs.
  • The total amount of tax relief for P Ltd and Q Ltd in respect of contributions paid to the registered pension scheme should to be deducted from the group’s profit before tax for the period.