CTM04890 - Corporation tax: CT loss reform: commencement: companies affected by the corporate interest restriction
F(2)A17/SCH4/PARA191 to PARA192
Commencement provisions generally are explained at CTM04880.
These are modified by PARA191 to PARA192 where a company has an amount of interest that is restricted under the corporate interest restriction (TIOPA10/PART10), which also has effect from 1 April 2017. The modifications mean that, for the purposes of the loss reform, the effects of the interest restriction are taken into account in the deemed period beginning 1 April 2017. For general guidance on the corporate interest restriction (‘CIR’) see CFM95000 onwards.
These provisions refer to a company with an accounting period beginning before and ending after 1 April 2017 that needs to apportion an amount between two notional periods falling before and after that date, in accordance with F(2)A17/SCH4/PARA190.
The provisions apply when that amount (the amount concerned) is
- An amount chargeable to Corporation Tax which would have been less if not for the corporate interest restriction (for example, where a non-trading loan relationship (NTLR) profit would have been smaller if not for the interest restriction);or
- An amount for which relief from Corporation Tax is available, and this relief would have been greater if not for the corporate interest restriction (for example, where an NTLR deficit would have been greater if not for the interest restriction);or
- An amount chargeable to Corporation Tax which would not have arisen if not for the corporate interest restriction (for example, where a NTLR profit would not have arisen, and the company would instead have incurred an NTLR deficit, if not for TIOPA10/PART10).
The amount will not always be an NTLR profit or deficit. If the company has trading loan relationships, the amount in question may be a trading loss or profit. However, it should not strictly be a notional net profit for the period, since such an amount is not amongst the amounts apportioned for the purposes of the CT loss reform (see CTM04880).
Note that the core calculations under the CIR are made at group level by reference to ‘periods of account’ of the ‘worldwide group’. The calculations require amounts to be derived from the computations of ‘UK group companies’ for accounting periods that coincide with or overlap the worldwide group period of account (‘relevant accounting periods’). At the end of the process, ‘interest restrictions’, or ‘interest reactivations’ may be allocated to accounting periods of UK group companies. (For a glossary of terms used in the CIR legislation and guidance see CFM95190.)
The commencement rules for the CIR provide that where, for instance, a worldwide group draws up ‘consolidated financial statements’ for a period straddling 1 April 2017, it will have a CIR period of account beginning on 1 April 2017 and ending on the date to which the consolidated financial statements are drawn up. No time interval before 1 April 2017 can be included in a CIR period of account.
The CIR has detailed rules dealing with non-coincidence of UK group company account periods and worldwide group periods of account. In particular, in computing for an accounting period the amounts of a company’s
- ‘tax-interest expense’ TIOPA10/S382 (7),
- ‘tax interest income’ S385 (8), and
- ‘tax-EBITDA’ S406 (6)
that are taken into account in the group level calculations for the worldwide group period of account, the amounts arising to a company for a ‘disregarded period’ must be left out of account.
The legislation, for instance in S382 (8), requires the amounts arising to a company for its entire accounting period to be reduced by such amount as is referable, on a just and reasonable basis, to the disregarded period. See CFM95620.
These apportionments must be made as part of the process of applying the CIR and will therefore have been taken into account before the results for a company accounting period are determined. Where the apportionments described below are made in a manner inconsistent with those applied in the CIR calculations, they (or the CIR apportionments) will not be regarded as having been made on just and reasonable basis.
Note also that not all amounts taken into account under the loan relationships provisions will be included in ‘tax-interest’, notably foreign exchange differences - for which a time-based apportionment might sometimes be inappropriate.
The effect of F(2)A17/SCH4/PARA191 to PARA192 is as follows:
Situations 1 and 2
In situation 1 and situation 2, if for the actual accounting period the amount concerned is a profit which would have been less but for the corporate interest restriction, or a loss which would have been greater but for the restriction, the company must establish what the result would have been but for the corporate interest restriction. This amount (the result that would have arisen if not for the interest restriction) is called the notional amount. The actual result for the accounting period is called the amount concerned.
- The company first establishes what portion of the notional amount would have been attributed to the period ending 31 March 2017 if the corporate interest restriction had not affected the profit or loss of the period. This figure is called the notional apportioned amount.
- If the notional apportioned amount is equal to or greater than the amount concerned, the whole of the amount concerned is apportioned to the first deemed accounting period. Otherwise, the notional apportioned amount is apportioned to the first accounting period and the remainder of the amount concerned is apportioned to the second deemed accounting period.
Example
For example, a company with an accounting period 1 January to 31 December 2017 has an NTLR profit of £20m. Its non-trading interest restricted under TIOPA10/PART10 is £8m, meaning its NTLR profits would have been £12m if it had not been for the interest restriction.
It is assumed in these examples that the calculation of disregarded amounts of tax-interest expense, tax-interest income and tax-EBITDA under the CIR legislation were calculated by time apportionment and that, in the circumstances, it was just and reasonable to use this method.
- The company’s amount concerned is £20m.
- The notional amount, the NTLR profit it would have had were it not for the interest restriction, is £12m.
- Apportioning the notional amount on a time basis does not give a result that is unjust or unreasonable, so £2,958,904 (90/365 x £12m) of the notional amount would have been apportioned to the first deemed accounting period if not for the interest restriction, meaning the notional apportioned amount is £2,958,904.
- This is less than the amount concerned of £20m and so £2,958,904 of the NTLR profit is apportioned to the first deemed accounting period. The remainder of the amount concerned is £17,041,096 and that is apportioned to the second deemed accounting period.
Example
- If, instead, the company had made a trading loss of £12m during an accounting period which would have been a loss of £96m but for a restriction of trading amounts of interest within TIOPA10/PART10 of £84m, the amount concerned is a loss of £12m and the notional amount is £96m.
- Using a time basis, the notional apportioned amount is £23,671,233 (90/365 x £96m). This gives a notional apportioned amount that is greater than the amount concerned and so the entire amount concerned of £12m is apportioned to the first deemed accounting period. The second deemed accounting period will have nil apportioned.
Situation 3
In situation 3, where an amount is in profit for the accounting period (applying the corporate interest restriction) and would have had been a loss or nil for the actual accounting period if it were not for the restriction, the entire profit of the actual accounting period is treated for the purposes of the loss reform as arising in the deemed period beginning 1 April 2017.
Example
A company has an NTLR profit of £10 million for the actual accounting period. If not for the interest restriction, there would have been a NTLR deficit of £1 million for the period. The company therefore apportions the entire £10 million NTLR profit to the deemed period beginning 1 April 2017.
Further guidance
CTM04970 provides a more detailed example showing how the commencement provisions apply to companies affected by the corporate interest restriction.