MTT61060 - Charging mechanisms: The charge: Attributing top-up amounts to a responsible member - Inclusion ratio

A responsible member’s inclusion ratio for a relevant member is determined by the following process:

Step 1: Determine the adjusted profits of the relevant member (see MTT21000+).

Step 2: Determine how much of those profits are attributable to ownership interests held by individuals and entities other than the responsible member, excluding interests in respect of which an amount has been excluded from the adjusted profits.

Step 3: Subtract the result of Step 2 from Step 1 to find the profits of the relevant member that are attributable to the responsible member.

Step 4: The inclusion ratio is given by dividing Step 3 by Step 1. This represents the profits attributable to the responsible member in proportion to the total adjusted profits.

If a relevant member is wholly owned by a responsible member, the inclusion ratio will always be 1.

This is set out in section 201 of Finance (No.2) Act 2023.

Exclusion of ownership interests where amounts are excluded from adjusted profits

The inclusion ratio considers how to attribute the adjusted profits between ownership interests. Therefore, where an amount of profits has already been excluded from the adjusted profits due to a reallocation  to another member (for example, where adjusted profits are reallocated from a flow-through entity), none of the residual adjusted profits should be considered attributable to the ownership interests of that member.

Attribution of adjusted profits

In step 2 of the process for determining the inclusion ratio, it is necessary to determine the profits to be attributed to ownership interests held by persons other than the responsible member.

The amount to be so attributed is the amount that would, in hypothetical consolidated financial statements (CFS) prepared by the responsible member, have been treated in those CFS as attributable to persons other than the responsible member. The accounting standard used to prepare the CFS of the ultimate parent is to be used for the purpose of determining these hypothetical consolidated financial statements.

Additionally, that amount should be determined using the following assumptions:

  • that the relevant member’s profits were its adjusted profits as determined for MTT purposes (see MTT21000+).
  • that the responsible member had a controlling interest (see MTT17030) in the relevant member, such that all of the relevant member’s income and expenses were consolidated on a line-by-line basis with those of the responsible member.
  • that all of the profits of the relevant member were attributable to transactions with persons who are not members of the group.
  • that all ownership interests that are not directly or indirectly held by the responsible member were held by persons other than members of the group.

Ultimate parent does not prepare consolidated financial statements

Where the ultimate parent does not prepare CFS, the accounting standard used for inclusion ratio purposes must be the same as is used by the UPE to create hypothetical CFS.

See MTT09520 for guidance on the consolidated financial statements.

Investment entities

The inclusion ratio is applied to investments entities with certain modifications. See MTT45190 for further guidance.

Example

X Ltd is a 70% subsidiary of Y Ltd. Y Ltd is a responsible member. The remaining shares are 20% owned by Z Ltd and 10% owned by an individual person. X Ltd has adjusted profits of £10 million and a top-up amount of £1 million.

The inclusion ratio of Y Ltd in respect of X Ltd is determined as follows.

Step 1: X Ltd has adjusted profits of £10 million.

Step 2: In the hypothetical consolidated financial statements of Y Ltd, £3 million of the profit of X Ltd is attributable to persons other than Y Ltd.

Step 3: £10 million – £3 million = £7 million

Step 4: £7 million / £10 million = 0.7

The inclusion ratio for Y Ltd in respect of X Ltd is therefore 0.7.

This ratio is then applied to the top-up amount of X Ltd of £1 million. Y Ltd is therefore responsible for £700,000 of top-up tax in respect of X Ltd.

Where the inclusion ratio must also be determined for Z Ltd, this will be done separately.

Amendment in Finance Act 2025

Section 201 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).