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HMRC internal manual

Corporate Finance Manual

Interest restriction: alternative calculations: interest allowance (alternative calculation) election: changes in accounting policy

TIOPA10/S462-472

Some groups and businesses naturally have a higher level of indebtedness than others. The Corporate Interest Restriction rules permit groups to obtain relief in line with genuine third party debt in two ways:

The group ratio method allows a higher amount of tax-interest expense to be deducted if the group ratio percentage is higher than 30%. The percentage is based on the ratio of qualifying net group-interest expense to group-EBITDA for the group based on its financial statements.

The public infrastructure rules allow qualifying infrastructure companies to exclude amounts of tax-interest expense and tax-EBITDA from the rules.

Amounts due on related party debt are restricted from being taken into account in calculating the qualifying net group-interest expense, which is used in the group ratio, and the amounts of tax-interest expense to be excluded under the infrastructure rules.

General rule

The general rule is that a person A will be related to person B on a particular day where any one of the following conditions is met:

The consolidated condition

The participation condition

The 25% investment condition

Specific inclusions

There are three specific rules which deem loans, and other financial liabilities, as made between related parties:

liabilities guaranteed by a related party

liabilities where a related party indirectly stands as a creditor

liabilities held in the same proportion as equity

Specific exclusions

However the following cases will not be regarded as being made between related parties:

loans where more than 50% is held by unrelated parties

loans following a corporate rescue

ordinary independent financing arrangements by banks and others

loans made by relevant public bodies

finance leases granted before 1 April 2017

Information not available

Exceptionally, a UK group or sub-group may be unable to obtain information required to determine the scope of the worldwide group. CCMs and other HMRC staff should be prepared to discuss a pragmatic solution with any UK group or sub-group that genuinely finds itself in such a situation.

If appropriate, HMRC may use their powers to require another group member to provide the necessary information (TIOPA10/SCH7A/PARA62).

Priority of specific rules

TIOPA10/S462 includes a priority rule which provide that the specific exclusions listed above take priority over the specific inclusions. However, this does not mean that an exclusion rule will always switch off an inclusion rule, as illustrated in Example 2 below.

Example 1

XY PLC has ten investors with 10% interest each. The company has issued debt of £100m, of which each investor holds £1m in proportion to their shareholdings. The remainder of the £90m debt is held by third party lenders. The debt held by the shareholders carries exactly the same rights as the debt held by the third party lenders.  

In this case all of the debt is treated as unrelated debt. The exclusion for loans where more than 50% is held by unrelated parties has priority over the inclusion for loans held in the same proportion as equity.

Example 2

A Ltd borrows £20m from B Ltd and £80m from X Ltd on the same terms. C Ltd provides a guarantee for all of A Ltd’s liability. B Ltd and C Ltd are both related parties of A Ltd under the general participation condition whereas X Ltd is not related to A Ltd under any of the general rules.   

Section 466 (liabilities guaranteed by a related party) and section 468 (loans where at least 50% is held by unrelated parties) are both in point. Under the priority rule, section 468 could potentially take priority over section 466 so that the loan from B Ltd to A Ltd would be treated as if it were not between related parties.

However, the first step in applying these rules is to apply section 466 to the loan from X Ltd to A Ltd.  Because of the guarantee provided by C Ltd this is treated as if it were a related party loan for the purpose of TIOPA10/PART10.  In particular, this loan is treated as if between related parties when applying section 468. So for the purpose of section 468, it is not the case that at least 50% of the debt is held by unrelated parties, and the loan from B Ltd is not excluded from being treated as a related party loan.

Note

Both the calculation of QNGIE (TIOPA10/S415) and public infrastructure rules (TIOPA10/S438) can disapply TIOPA10/S466 in certain situations. Where this is the case, section 468 would apply and neither B Ltd nor X Ltd would be treated as related parties of A Ltd.