This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Finance Manual

Interest restriction: joint ventures: interest allowance (consolidated partnerships) election: example with interest allowance (consolidated partnerships) election

X plc gets a 50% profit share from the partnership but it controls the partnership. This means that the partnership is consolidated into X plc’s financial statements. X plc has an operating profit of 100 with third party interest expense of 75. The partnership has operating profits of 150 and 30 of third party interest expense.

 

The position without the election

Firstly assume that an election is not made.

Accounts X plc   Partnership X plc group
         
         
Operating profit 100   150 250
3rd party interest expense (QNGIE) (75)   (30) (105)
         
         
Profit before tax 25   120 145
         
  X plc Group      
Qualifying net group-interest expense 105 (A)    
         
PBT 145      
Add back interest expense 105      
Group EBITDA 250 (B)    
         
Group Ratio 42% (A/B)    
         
Interest allowance X plc      
Tax-EBITDA 175      
X plc group ratio 42%      
Interest allowance 74      
         
Net tax-interest expense 90      
Less interest allowance (74)      
Restriction 16      

 

For the purpose of calculating the group ratio X plc picks up a small amount of interest but a large amount of group-EBITDA from the partnership. The group ratio is calculated on a group-EBITDA of 250. However when calculating the interest allowance the group ratio is applied to a tax-EBITDA of 175. This disparity between group-EBITDA and tax-EBITDA causes an interest restriction of 16.

With the consolidated partnership election

Applying the same figures and making an interest allowance (consolidated partnerships) election. Under this election the financial statements for the group are assumed to include a share of the partnership’s profits instead of being fully consolidated. 

Accounts X plc   Partnership X plc group
         
         
Operating profit 100   150 100
3rd party interest expense (QNGIE) (75)   (30) (75)
Share of profits of partnership       60
         
Profit before tax 25   120 85
         
  X plc Group      
Qualifying net group-interest expense 75 (A)    
         
PBT 85      
Add back interest expense 75      
Group-EBITDA 160 (B)    
         
Group ratio 47% (A/B)    
         
Interest allowance X plc      
Tax-EBITDA 175      
X plc group ratio 47%      
Interest allowance 82      
         
Net tax interest expense 90      
Less interest allowance (82)      
Restriction 8      

The election is applied by treating the partnership as a joint venture. The election increases the group ratio to 47% and reduces the interest restriction to 8.

However, the worldwide group also has the option to elect into the Investment Allowance (non-consolidated investment) election.

With the consolidated partnership and non-consolidated investment elections

Applying the same figures and making an interest allowance (consolidated partnerships) election and an interest allowance (non-consolidated investment) election.

Accounts X plc   Partnership X plc group
         
         
Operating profit 100   150 100
3rd party interest expense(QNGIE) (75)   (30) (75)
Share of profits of partnership       60
         
Profit before tax 25   120 85
         
  X plc Group      
X plc share of profits from JV 50%      
         
Calculation of QNGIE        
         
QNGIE in X plc 75      
Share of JV QNGIE 15      
Total QNGIE 90      
         
Calculation of group-EBITDA        
         
Group-EBITDA of X plc group 160      
Reduction in group-EBITDA from JV profits (60)      
Share of JV’s Group-EBITDA 75      
Group-EBITDA 175      
         
Group ratio 51%      
         
Interest allowance X plc      
Tax-EBITDA 175      
X plc group ratio 51%      
Interest allowance 90      
         
Net tax-interest expense 90      
Less interest allowance (90)      
Restriction -      

Here the effect of the non-consolidated investment election with the consolidated partnership election increases the group ratio to 51%. X plc’s net tax-interest expense is not restricted.