CFM96870 - Interest restriction: joint ventures: group ratio (blended) election: example
If there is third party and related party interest in the example shown in CFM96860 the effect of a blended group ratio can be demonstrated.
Link to the structure diagram for this example
Election not made
| Accounts | JV | 
|---|---|
| Operating profit | 100 | 
| Third party interest expense (QNGIE) | - 35 | 
| Related party interest | - 30 | 
| Profit before tax | 35 | 
| Calculation of adjusted net group-interest expense | JV | 
|---|---|
| Third party interest expense | 35 | 
| Related party interest expense | 30 | 
| Adjusted net group-interest expense | 65 | 
| Calculation of group ratio | JV | 
|---|---|
| Qualifying net group-interest expense | 35 | 
| PBT for the JV | 35 | 
| Add back adjusted net group-interest expense | 65 | 
| Group-EBITDA | 100 | 
| Group Ratio | 35% | 
| Interest allowance | JV | 
|---|---|
| Tax-EBITDA | 100 | 
| X plc group ratio | 35% | 
| Interest allowance | 35 | 
| Net tax-interest expense | 65 | 
| Less interest allowance | - 35 | 
| Restriction | 30 | 
When the election is not made the group ratio of the JV is calculated under TIOPA10/s399 which works out at 35%. As the related party interest does not contribute to the group ratio there is a restriction of 30 in the JV
Blended group ratio election made
| Accounts | JV | 
|---|---|
| Operating profit | 100 | 
| 3rd party interest expense (QNGIE) | - 35 | 
| Related party interest | - 30 | 
| Profit before tax | 35 | 
| Calculation of adjusted net group-interest expense | JV | 
|---|---|
| Third party interest expense | 35 | 
| Related party interest | 30 | 
| Adjusted net group interest expense | 65 | 
- Blended Group Ratio from example in CFM96860 - 55%
 
| Interest allowance | JV | 
|---|---|
| Tax-EBITDA | 100 | 
| Blended group ratio | 55% | 
| Interest allowance | 55 | 
| Net tax-interest expense | 65 | 
| Less interest allowance | - 55 | 
| Restriction | 10 | 
If this situation is compared to the circumstance where no election is made the restriction is reduced to 10. Therefore, in this circumstance it is advantageous to make a group ratio (blended) election.