Finance Bill Tracking Service 2010 | Budget 2010

BN06 RELIEF FOR INTEREST: AMENDMENTS TO THE "WORLDWIDE DEBT CAP" LEGISLATION

Who is likely to be affected?

1. Groups of companies - but not groups that consist wholly of small or medium-sized enterprises.

General description of the measure

2. The "worldwide debt" cap was introduced last year to guard against excessive debt funding of UK companies. The legislation, which has now been rewritten into Part 7 of the Taxation (International and Other Provisions) Act 2010, does this by restricting relief for UK financing costs where these exceed the financing costs of the worldwide group.

3. In November 2009, the Financial Secretary to the Treasury announced a number of changes to the legislation to be made in Finance Bill 2010. These changes have come about as a result of consultation with business, and will ensure that certain aspects of the debt cap work as originally intended. Since the 2009 Pre-Budget Report (PBR), consultation has brought to light some further areas where changes are to be made.

4. The Government intends to legislate these changes in a Finance Bill to be introduced as soon as possible in the next Parliament.

Operative date

5. The debt cap legislation as a whole applies to periods of account of the worldwide group beginning on or after 1 January 2010, and with one exception the changes will apply from that date. The exception is the extension of the scope of "relevant assets" and "relevant liabilities" for the gateway test (see paragraph 8 below), where groups may elect for the change to apply only prospectively.

Current law and proposed revisions

6. Two of the further changes now being made relate specifically to securitisations. Where a group includes securitisation companies that are within the special corporation tax (CT) regime for securitisation companies, the "available amount" (the financing costs of the group as a whole) is computed as if the results of the securitisation companies were not included in the group's consolidated accounts. This is complementary to the provision already announced, which excludes securitisation companies from the computation of UK financing costs and income.

7. Furthermore, the legislation will include a power to make regulations that will enable a company involved in capital market arrangements, and which incurs an additional CT liability as a result of the debt cap, to transfer that liability to another company in the group.

8. The other changes that are being made are as follows:

•    the assets and liabilities of companies that are taken into account for the "gateway test" will include long-term arrangements that have the economic effect of loans and which give rise to an interest-like return, even where these do not have the legal form of loans;

•    it will be made clear that a limited liability partnership cannot be the ultimate parent of a group of companies for debt cap purposes; and

•    distributions made by industrial and provident societies, which are normally treated as interest for tax purposes, will be excluded from the financing expenses of such companies.

Further advice

9. Changes to the worldwide debt cap rules announced in 2009 were summarised in PBR Note 04 and draft legislation embodying these changes was published at PBR. These documents are available at www.hmrc.gov.uk/pbr2009

10. If you have any questions about these changes, please contact Sue Davies on 020 7147 2565 (email: sue.davies2@hmrc.gsi.gov.uk) or Lesley Hamilton on 020 7147 2564 (email: lesley.hamilton@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk