CFM92820 - Debt cap: income from EEA group companies: financing income amounts potentially involved

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

Financing income amounts that are potentially subject to TIOPA10/PT7/CH5

TIOPA10/PT7/CH5 contains a separate definition of ‘financing income amount’ for Chapter 5 purposes. A financing income amount has to meet one of three conditions before it can potentially be exempted from being brought into account for the purposes of corporation tax. This is subject to the other provisions of Chapter 5 being met.

These are:

Condition A

  • The amount is a credit that would be brought into account for the purposes of corporation tax, apart from the operation of Chapter 5, in respect of

  • a loan relationship for the purposes of trade (by virtue of TIOPA10/S297 the credit is treated as trading income within CTA09/Part 3 ), or a non-trading loan relationship (under CTA09/Part 5), and
  • is not an excluded credit.

The types of loan relationship credits that are excluded are:

  • reversals of impairment losses, see CFM33220 for further guidance
  • exchange gains, and
  • profits from related transactions, further guidance can be found at CFM31120.

Loan relationship credits also include amounts set out in Part 6 CTA 2009 that are brought into account under CTA09/S294 . These include deemed loan relationships - see CFM40000.

Condition B

If an amount represents the financing income that is implicit in amounts received under a finance lease, then it is potentially subject to Chapter 5.

These do not involve the lending of money, but the financing income element of lease payments received represents the difference between the capital cost of the asset and the total rental payments.

Condition C

If the amount represents the financing income that is implicit in amounts received under debt factoring or similar arrangements, then it is potentially subject to Chapter 5.

Debt factoring is an arrangement where a business uses an agent to collect debts on its behalf. The factoring agent advances funds to the business in the amount of the debts that are due to the business, and the agent then receives the debts as and when they fall due. The fee received by the agent from the business for this service includes an element of financing income to represent the advance of funds.

It will be seen that the definition of ‘financing income amounts’ for Chapter 5 purposes parallels the definition in TIOPA10/S314, and the guidance on S314 (see CFM91230) applies also to the TIOPA10/S305 definition. CFM92830 covers the interaction between Chapter 5 and the main debt cap provisions.

Condition D

Financing income includes amounts receivable for providing a guarantee for the borrowing of another company.