INTM561350 - Hybrids: allocation of DII within a group: the unused part of DII surplus

This is the DII surplus of Company A for the overlapping period less any amounts of DII surplus already allocated to other companies (prior allocation claim) for that period. It is therefore the amount available for Company B to make an allocation claim against.

The DII surplus for the overlapping period is the proportion of the surplus period that falls in the overlapping period multiplied by the DII surplus.

Step 1 – Identify the overlapping period for the prior allocation claim.

Step 2 – Prior allocation claims are calculated by first finding a period that is common to the overlapping period of the current allocation claim and the overlapping period of the prior allocation claim (the common period). If there is a common period proceed to Step 3.

Step 3 – The amount of a prior allocation claim for that period is the proportion of the overlapping period of the prior allocation claim that falls within the common period, multiplied by the total DII surplus allocated to the prior allocation claim.

Once all such prior allocation claims for that period have been deducted from the DII surplus, the remaining amount is the unused part of the DII surplus, which is available for the current allocation claim.

Example

Company A has an accounting period of 1 January 2023 to 31 December 2023 in which it has a DII surplus.

Company B has an accounting period of 1 April 2022 to 31 March 2023 in which it has a DII shortfall.

The overlapping period of Company A and Company B is 1 January 2023 to 31 March 2023.

Company C has an accounting period of 1 July 2022 to 30 June 2023 in which it has a DII shortfall.

The overlapping period between Company A and Company C is 1 January 2023 to 30 June 2023.

Company A has DII surplus for its surplus period of 100. Company B has a DII shortfall for its shortfall period of 100. It intends to make an allocation claim (the current allocation claim).

Company C has a DII shortfall of 100 for which it has already made an allocation claim for part of the DII surplus of company A (the prior allocation claim).

The proportion of Company A’s 12-month surplus period that falls within the overlapping period with Company C is 50, which is (6/12) months of the overlapping period multiplied by DII surplus of 100.

Company C’s prior allocation claim is therefore for 50 of Company’s A’s DII surplus.

Step 1 – The overlapping period of the prior allocation claim is 1 January 2023 to 30 June 2023.

Step 2 – The common period between the overlapping period of the prior allocation claim, and the overlapping period of the current allocation claim is 1 January 2023 and 31 March 2023.

Step 3 – Three months of the overlapping period at Step 1 falls within the common period at Step 2. The amount of prior allocation claim related to the common period is 25, which is (3/6) months multiplied by the total prior allocation claim of 50.

The unused part of DII surplus is 25, which is the total prior allocation claim of 50 less the amount related to the common period of 25. This means Company B could claim a maximum of 25 from Company A.

If the application of a proportion to the calculation results in an amount that is not just and reasonable, the proportion can be modified to produce an amount that is just and reasonable.

You should apply an alternative basis of apportionment in any case where

  • the alternative basis is likely to give significantly different results, and
  • the amount of tax at stake is worthwhile

The following are examples of when you should consider applying the alternative basis

  • there has been significant change in the pattern of the company’s DII compared to previous periods, or
  • a particular event falls within or without the period to which profits or losses are to be apportioned, or
  • the company’s business is one in which occurrences of DII are large and irregular, or
  • the company’s business is both substantial and seasonal, or
  • there is evidence of manipulation of the timing of relevant events within the accounting period