CFM98620 - Interest restriction: administration: reporting requirements: computing disallowed tax-interest available for reactivation

TIOPA10/SCH7A/PARA25

The calculation of interest reactivations at company level can be complicated. This is because the interest reactivation cap is a group attribute for a worldwide group period of account. By contrast, the total disallowed tax-interest expense brought forward is a company attribute, as at the beginning of a company accounting period. The rules need to ensure the correct interaction between the two, even where company accounting periods do not coincide with a group’s period of account (the return period), and where companies join or leave the group during the course of the company’s accounting period or the group’s period of account.

Against this background, there are two factors limiting interest reactivations - one determined at a company level, and the other across the group as a whole. Subject to these limits, the group is required to reactivate the maximum possible amount of tax-interest expense for the period of account. This maximum amount is the lower of:

• The sum of the amounts available for reactivation of each company for the return period (TIOPA10/SCH7A/PARA25(4)(a)); and
• The interest reactivation cap for the group (PARA25(4)(b) and s373(3)).

The sum of the reactivations allocated by the reporting company in a statement of allocations must equal this amount (PARA 25(4)).

The amount allocated to a company in the statement must not exceed its maximum amount available for reactivation (PARA25(3)), and cannot be a negative amount.

A principle underlying these rules is that a group should reactivate amounts at the earliest possible opportunity; it cannot hold over amounts that could have been reactivated to a later period.

The group’s interest reactivation cap is a limit that works across the group as a whole. It is simply the interest allowance of the group for the period (TIOPA10/S396), less the aggregate net tax-interest of the group for the period (S390). These figures relate to group periods of account, not company accounting periods, and do not take into account any amounts relating to other periods of account.

The other limits work per company and by reference to company accounting periods. They are driven primarily by the aggregate allocated disallowances of a UK group company for earlier accounting periods which have not previously been reactivated.

The exception is the company’s interest reactivation cap (PARA26(2)(b) and PARA26(5)). The reactivation amount allocated to a company for a period of account cannot exceed this overriding limit. It is the group reactivation cap for the period of account, multiplied by the proportion of that period of account for which the company is a UK group company.

One effect of this limit is to prevent a disproportionate reactivation amount being allocated to a company that leaves a group during a period of account.

Subject to that overriding per period of account limit, the amount available for reactivation by a UK group company in an accounting period is given by a formula, A + B - C + D - E, explained below.

A is the total disallowed tax-interest expense brought forward from earlier periods. This is the aggregate amount disallowed in earlier accounting periods, as reduced by any amounts that had been reactivated in earlier periods. This is an attribute of the company, so this figure may include allocated disallowances for earlier accounting periods when it was a member of a different group.

In the straightforward case of a company that does not change group, and which has an accounting period that coincides with the group period of account, the amount available for reactivation is simply amount A.

B is the amount of tax interest expense that the company has to leave out of account in the same accounting period, but for an earlier period of account of the same group. So in the earlier period of account the reporting company allocates disallowances, but in the later it allocates reactivations and the company accounting period straddles the two periods of account for the group. This increases the amount available for activation in the second part of the accounting period (in the worldwide group’s return period). So, whilst a group cannot have disallowances and reactivations in the same period of account, it is possible for a company to have both activations and disallowances in the same accounting period - due to the interaction of the rules for groups and companies.

The other positive amount, D, only comes into play where a company becomes a member of the worldwide group during a relevant accounting period. This is an accounting period part or all of which falls within the group’s period of account. Amount D is any disallowance allocated to it for the same accounting period, but before it joined its current worldwide group.

The other amounts, C and E, reduce the amount that may be reactivated in the relevant accounting period.

C is the converse of B. It is the amount of tax-interest the company is able to bring into account (as a reactivation) in the same period of account, but relating to an earlier period of account of the worldwide group.

Like amount D above, E only comes into play where a company becomes a member of the worldwide group during a relevant accounting period. It is the converse of D: the amount of tax-interest the company is able to bring into account (as a reactivation) in the same accounting period, but before it joined its current worldwide group.

There is a default order in which different classes of tax-interest may be reactivated, which the company can elect to override, see CFM98690.