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HMRC internal manual

Corporate Finance Manual

Interest restriction: alternative calculations: interest allowance (alternative calculation) election: employee share acquisitions

TIOPA10/S424A

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. 

For periods of account beginning on or after 1 January 2019, one such adjustment that is made under this election is that the amounts that are included in respect of employee remuneration are based on the tax relief available, or which would be available, under the UK tax rules.

Background

The corporation tax rules contain special rules which govern the timing of relief in respect of employee remuneration. Under CTA09/S1288, where remuneration has not been paid within nine months of the end of the end of a period of account for which it is reported, the company cannot deduct the amount for corporation tax in that period.  Instead, relief is obtained in the period when the remuneration is actually paid.

Effect of the election

Under the interest allowance (alternative calculation) election, the calculation of group-EBITDA is amended so that amounts of employee remuneration which remain unpaid nine months after the period of account are excluded from the group profit before tax.  Instead, the amounts are included in the group’s profit before tax in the period in which the amount is actually paid.

This treatment applies to non-UK group companies as if the employer company was within the charge to corporation tax.