CFM90480 - Debt cap: group accounts: groups merging and de-merging

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Groups merging and de-merging

In FA12 rules were introduced in section TIOPA10/S348A to provide a framework for the debt cap computation when groups merge or de-merge. The rules do not apply to situations where single companies join or leave a worldwide group as the rules for calculating the gateway test, financing expense, financing income, tested expense amount and tested income amount already deal with this situation. The FA12 rules apply when:

  • there is a relevant event
  • as a result of the relevant event there is the change in the ultimate parent of a worldwide group, or
  • a change in the ultimate parent of any other group that is party to the relevant event
  • financial statements are drawn up, or would be drawn up under section 348 for a period of account that includes the relevant event - this is the straddling period.

A relevant event is the merger or de-merger of a group. If these conditions apply then section 348A operates so that the debt cap rules apply as if:

  • financial statements have not been drawn up by the worldwide group for the straddling period
  • Section 348 does not apply to require the creation of the non-existent financial statements for that period.

Instead the worldwide group is treated as if it had drawn up two sets of financial statements, one set for the period before the relevant event up to the date of the relevant event and another set from the relevant event to the end of the period of account (or to 31 March 2017, if earlier).

HMRC staff should be aware that preparing two sets of financial statements might involve considerable work in some cases, and should not be over-prescriptive in their approach. It may be possible to calculate the debt cap position before and after the relevant event using management accounts or other accounts or documents prepared for the relevant event.

Examples of relevant events and their effect on the straddling period are in CFM90485 - CFM90490 below.

Repeal of the debt cap rules

From 1 April 2017 the worldwide debt cap rules are repealed and replaced with the corporate interest restriction (CIR).

Where consolidated financial statements are prepared for a period that straddles 1 April 2017, in applying the existing debt cap, a worldwide group period of account will be treated as ending on 31 March 2017. So long as the accounting policies used in the actual accounts are acceptable, the financial statements treated as having been used in the worldwide group period of account ending on 31 March 2017 are treated as having drawn up under those standards- F(No.2)A17/SCH5/PARA26(5) and (6).

Guidance on the new rules on the CIR is available online at:

https://www.gov.uk/government/publications/corporate-interest-restriction-draft-guidance