CFM95720 - Interest restriction: tax-EBITDA: Adjusted Corporation Tax Earnings

TIOPA10/S406, S407

The adjusted corporation tax earnings are the taxable profit or loss of a company for an accounting period adjusted for certain items. These amounts are aggregated to derive the tax-EBITDA of a company for a group’s period of account.

It is based on the sum of two amounts:

  • Condition A amounts are brought into account when determining taxable total profits of the period; and
  • Condition B amounts are amounts which would have been brought into account in determining taxable profits for the period had there been sufficient profits.

Condition B is included to ensure all profits and losses are included in the calculation of the adjusted corporation tax earnings for the accounting period.

Note that the adjusted corporation tax earnings can be a negative amount, representing a loss for the period (taking account of the adjustments explained below).

Adjustments

In calculating the adjusted corporation tax earnings of the company for an accounting period, certain adjustments are made. These operate to exclude amounts which would otherwise be included as Condition A or Condition B amounts.

The excluded amounts are outlined in S407(1). They comprise three types of adjustment.

Firstly, amounts are excluded to calculate the taxable profit (or loss) before interest, depreciation and amortisation. These consist of:

Secondly, amounts are excluded where they consist of losses arising in another group company or from another accounting period. There are, however, two exceptions to this:

  • The exclusion for losses made outside the relevant accounting periods does not apply to capital losses under TCGA1992. Capital losses are, however, excluded from Condition B amounts. This means that capital losses are included only to the extent they are deducted from chargeable gains.
  • The exclusion for group relief / consortium relief (including losses brought forward and surrendered under CTA10/S188CK), does not extend to any claim of group relief / consortium relief that is attributable to losses that is not a loss of the group of which this claimant company is a member. This will be the case where the surrendering company is not a member of the CIR group, or was not when its loss arose. It is also likely the case where consortium relief is claimed. For further detail and an example of how the loss relief and CIR interact in such a scenario, see CFM95723.

Finally, the effect of certain qualifying tax reliefs is also excluded to ensure that the CIR does not diminish the effect of those regimes.

Specific rules also deal with leasing transactions and the effect of double taxation relief.

Non-sterling amounts

Where a corporation tax computation includes non-sterling amounts (for example, where the company has a non-sterling functional currency), these should be translated into sterling to calculate the tax-EBITDA.

As tax-EBITDA amounts are computed according to corporation tax rules, the translation should use the same exchange rate that is used in the corporation tax computation. This should be the rate used in accordance with CTA10/PT2/CH4.

Related guidance on calculating tax-interest can be found at CFM95610. CFM98258 has guidance on translating carry forward amounts.  

Disregarded periods

It is necessary to adjust the amounts included within adjusted corporation tax earnings for any disregarded periods which occur where:

  • A relevant accounting period of a company in the group falls partly outside of the group’s period of account, or
  • The company joins or leaves the group part way through the group’s period of account.