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.