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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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The ring fence: Finance cost adjustment

Examples

The examples below are designed to demonstrate how a just and reasonable result might be reached.  They are not intended to be exhaustive and have been kept simple.

Example 1

Scenario

A tonnage tax (TT) group consists of a parent and a wholly owned subsidiary.  Both companies carry out qualifying shipping operations and all activities are within TT.  External finance costs of £1m were incurred by the parent company.

Tax consequences

No adjustment will be required under paragraph 62 as all finance costs are within the TT ring fence.

Example 2

Scenario

A TT group comprises a UK parent (non TT) and a wholly owned UK subsidiary which is within TT.   The TT company is wholly funded by equity and the parent has incurred finance costs of £1m.  Both companies have similar funding requirements, so the just and reasonable apportionment is 50 per cent.

Tax consequences

The finance costs outside the TT ring fence exceed a reasonable proportion of the total costs, so an adjustment is required under FA00/SCH22/PARA62.

Using the suggested formula at TTM07450, the finance cost adjustment (FCA) will be:

A = £1,000,000 (group finance costs outside the ring fence)
   
B = £1,000,000  (total group finance costs assuming no TT election)
F = 50 per cent              (just and reasonable fraction)

 

FCA = £1,000,000 – (50% x 1,000,000 = £500,000)

 

FCA = £500,000

 

The FCA of £500,000 is assessable on the TT company as a non-trading loan relationship credit.  The net effect for the group is:

Deduction re finance costs (non TT company) -£1,000,000
   
FCA assessable on TT company £500,000
Net effect on the group -£500,000

 

Example 3

Scenario

A TT group comprises a UK parent (non TT) and a wholly owned UK subsidiary which is within TT.   The non TT company has finance costs of £750,000 and the TT company has incurred finance costs of £1m.  Both companies have similar funding requirements, so the just and reasonable apportionment is 50 per cent.

Tax consequences

Using the suggested formula at TTM07450, the FCA will be:

A = £750,000 (group finance costs outside the ring fence)
   
B = £1,750,000 (total group finance costs assuming no TT election)
F = 50 per cent (just and reasonable fraction)

 

FCA = £750,000 – (50% x 1,750,000 = £875,000)

 

FCA = Nil

 

In this example the finance costs outside the ring fence are less than the just and reasonable apportionment, so no FCA is required.  The legislation only permits an adjustment where the finance costs outside the ring fence exceed a just and reasonable amount, so a negative adjustment is not due.

Example 4

Scenario

A TT group consists of a UK TT company, a UK non TT company and an overseas company which qualifies to pay dividends under the provisions of paragraph 49 (see TTM06400 and following).  Finance costs of £1.2m have been paid by the UK non TT company.  All three companies have the same funding requirements.

Tax consequences

The finance costs outside the TT ring fence exceed a reasonable proportion of the total costs, so an adjustment is required under paragraph 62.  The overseas company counts as TT for FCA purposes as it is within paragraph 49, so the just and reasonable apportionment is 33.33 per cent.

Using the suggested formula at TTM07450, the finance cost adjustment (FCA) will be:

A = £1,200,000 (group finance costs outside the ring fence)
   
B = £1,200,000 (total group finance costs assuming no TT election)
F = 33.33 per cent (just and reasonable fraction)

 

FCA = £1,200,000 – (33.33% x 1,200,000 = £400,000)

 

FCA = £800,000

 

The FCA of £800,000 is assessable on the TT company as a non-trading loan relationship credit.  The net effect for the group is:

Deduction re finance costs (non TT company) -£1,200,000
   
FCA assessable on TT company £800,000
Net effect on the group -£400,000

References

Finance costs of group companies TTM07430