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Interest expense – post enactment changes to the world wide debt cap


Rather embarrassingly for the government, changes have been announced to the worldwide debt cap rules as enacted by Finance Act 2009. The amendments do not change the legislation significantly, but rather seek to correct what might be considered to be errors or anomalies. These changes will take effect from 1 January 2010 and therefore the amended rules will apply to groups of companies for the first period in which they may be subject to a debt cap restriction. As such it is important that groups use the amended legislation when analysing the extent to which the legislation impacts upon them. Draft legislation has been issued and comments are invited by HMRC, the closing date for which is 29 January 2010.

The changes which are likely to be most commonly encountered are:

  • The gateway test – removing mismatches under accounting standards (e.g. between UK GAAP and IFRS) which distort whether a group passes or not; and clarification that preference shares are excluded from the definition of relevant liabilities.
  • Income from guarantee fees will be included in finance income, despite this not being income under loan relationships rules.
  • Restrictions will be imposed on the types of ancillary costs included in calculating the “available amount” such that these relate to the costs of issuing securities or borrowing money and exclude other more remote costs, such as losses on derivatives hedging the borrowings.
  • The amount to be included for finance expense of a partnership of which a company is a member will be subject to a statutory definition. This deals with a distortion when the company’s share of partnership finance expense is included in the tested amount, but not also in the available amount where the partnership is not controlled by the group. It is proposed the finance expense will feature in both.
  • Differences between the scope of finance expense for the available and tested amounts will be eliminated (once HMRC can identify a practical way of doing so) e.g. where fair value changes may be included in the tested amount but not the available amount.
  • In computing the available amount, tax adjusted figures are to be used – even where, for example, the late payment of interest rules apply
  • Companies (‘excluded companies’) will be able to elect out of having debt cap disallowances allocated to them. All dual resident investment companies will be excluded companies to prevent them from avoiding the restriction in s404 ICTA 1988 which prevents such companies from group relieving loan relationships deficits.

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