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HMRC internal manual

Corporate Finance Manual

Interest restriction: joint ventures: overview

A worldwide group is defined at TIOPA10/s473 which consists of an ultimate parent and entities which are fully consolidated into the parent under IAS accounting standards.

This chapter of the guidance concerns the treatment of entities which the worldwide group holds interests in, but which are not fully consolidated into the financial statements of the ultimate parent. These entities are:

  • Joint ventures;
  • Associates; and
  • Subsidiaries held at fair value.

Joint ventures

A joint venture (JV) is defined for accountancy purposes as an entity in which the reporting entity holds an interest on a long term basis and is jointly controlled by the reporting entity and one or more other investors. The JV is controlled by the investors acting together and does not include instances where one of the investors has control of the JV. The JV is usually accounted for under the equity or gross equity method. This is where the profits earned by the JV are assessed and these profits are brought in by the investor in proportion of the investor’s share of the JV.

Associates entities

An associate is an entity other than a subsidiary in which another entity (the investor) has a participating interest and over whose operating and financial policies the investor exercises a significant interest.  There is not the requirement as for JV that control is exercised with other investors. The associate is usually accounted for under the equity or gross equity method.

Subsidiaries held at fair value

A subsidiary will be controlled by the worldwide group but for other reasons not consolidated into the ultimate parent. These subsidiaries can be held at fair value and follow the fair value method of accounting.

Group-interest and group-EBITDA

Where the worldwide group holds interests in non-group entities the results of the entity will not be consolidated, on a line-by-line basis, in the group’s financial statements.  As a result, any amounts of interest and other financing costs incurred by the non-group entity will not ordinarily be included within group-interest.  

The results of the non-group entity will be included into the group’s financial statement as follows:

  • The group’s share of the results of JVs and associates.
  • The fair value movements of the group’s investment in subsidiaries held at fair value.

These amounts will be recognised as items of profit or loss in the group’s financial statements. They will therefore be included in the group-EBITDA of the group.

This chapter of the guidance outlines additional flexibility to this treatment by introducing elections for unconsolidated entities which will allow groups and entities similar treatment to consolidated entities. In particular:

  • The interest allowance (non-consolidated investment) election is at TIOPA10/s427. It allows a worldwide group to include a proportion of qualifying net group interest, adjusted net group Interest and group-EBITDA of an associated worldwide group.
  • The group ratio (blended) election is at TIOPA10/s401. It allows an entity such as a Joint Venture which has two or more investors the option to take on a similar Group Ratio profile to that of its investors.
  • In addition, the interest allowance (consolidated partnerships) election at TIOPA10/s430 allows a worldwide group which fully consolidates a partnership the option to treat the partnership as if it were not fully consolidated into the worldwide group for the purpose of calculating the worldwide group’s group ratio, group-EBITDA, qualifying net group interest and adjusted net group interest.

Public infrastructure rules

TIOPA10/s444 concerns how qualifying infrastructure company JVs are treated under the public Infrastructure rules. This rule apply to a JV company that is a qualifying infrastructure company which has investors that are both non-qualifying infrastructure companies and qualifying infrastructure companies.

In this case these rules allow non-qualifying infrastructure company investors to be not disadvantaged by allowing the qualifying infrastructure company JV to effectively be divided between the two categories of investors, with the public infrastructure rules applying to the share of the company held by investors who are themselves qualifying infrastructure companies.