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HMRC internal manual

Tonnage Tax Manual

The ring fence: Finance costs

Meaning of ‘finance costs’

Finance costs are defined at FA00/SCH22/PARA63.  All of the costs arising from debt financing should be included and HMRC will expect this provision to be interpreted very broadly.  It could include off-balance sheet methods of financing.  However, finance costs will not normally include costs incurred through the late payment of debts, such as interest paid to trade suppliers or interest on late payments of corporation tax/PAYE/VAT.

For the purpose of calculating any adjustment that may be required (as described in TTM07420 and TTM07430), ‘finance costs’ means the cost of finance.

Matters to be taken unto account

The definition of finance costs is very widely drawn, and will include all costs arising from what would be considered on normal accounting principles to be financial transactions i.e. those which change the value of assets, liabilities or equity.

In particular it will include:

  • any costs giving rise to a trading or non-trading debit under the loan relationships legislation (CTA09/PART5),
  • any trading profit or loss in relation to debt finance brought into account under the financial instrument and derivative contracts legislation (CTA09/PART6 and PART7),
  • any exchange gain or loss within the meaning given by CTA09/S475 in relation to debt finance;
  • the finance cost implicit in a payment under a finance lease (but not the costs implicit in an operating lease), and
  • the finance cost payable on debt factoring or any similar transaction.

No adjustment if a profit

If the net result of aggregating all the various items to be included as finance costs is a profit (e.g. because exchange gains exceed interest charges) then no adjustment is to be made.


FA00/SCH22/PARA63(1) (meaning of ‘finance costs’) TTM17356
FA00/SCH22/PARA63(2) (matters to be included) TTM17356
FA00/SCH22/PARA63(3) (no adjustment if a profit) TTM17356
Outline of finance costs adjustment TTM07400
Interaction between transfer pricing and finance costs TTM07500