CFM96620 - Interest restriction: alternative calculation: group-EBITDA (chargeable gains) election: overview

TIOPA10/S422

The default approach for calculating group-EBITDA is based closely on the amounts recognised in the group’s financial statements. Under the default approach, the depreciation and amortisation adjustments are made in respect of relevant assets. This is to bring these assets into the calculation of group-EBITDA on a realisation basis and to exclude the effect of capital expenditure.

Where, however, the worldwide group’s reporting company has made a ‘group-EBITDA (chargeable gains) election’ in its interest restriction return, some further adjustments are made to the default approach to align the calculations more closely with the UK tax rules.

The election applies to assets held or disposed of by any member of the world group - its effects are not restricted to UK group companies.

While the election can be beneficial where single assets are disposed of, it is irrevocable, and can introduce further complexity where shares in a group member are disposed of, as it requires the capital gain or loss to be calculated for each underlying asset.

Background

While the UK rules for the taxation of chargeable gains are based on a realisation basis approach, there are a number of specific rules that can affect the calculation. For example:

  • The base cost of an asset can include an uplift for indexation.
  • If higher, companies can replace the original cost with the March 1982 value of the asset.
  • In certain cases, a market value price will be imposed on the transaction. This can be relevant, for example, with the privatisation of the water industry.
  • A gain can be ‘rolled-over’ or ‘held-over’ into the base cost of a new asset.

Furthermore, chargeable gains can be exempted from being taxed at all. In particular, gains and losses on the sale of shares can in certain cases be exempted under the substantial shareholdings exemption or may be covered by brought forward capital losses.

Effect of the election

Under the default approach, the depreciation and amortisation adjustments include the ‘recalculated profit amounts’ used in the capital (disposals) adjustment. This looks to calculate the profit on the disposal of relevant assets based on the disposal proceeds and the original cost as recognised in the group’s financial statements.

The group-EBITDA (chargeable gains) election replaces these recalculated profit amounts used in the capital (disposals) adjustment with the sum of any relevant gains less the sum of relevant losses that accrue on disposal of relevant assets. Where the sum of relevant gains less the sum of relevant losses is negative, the figure used is nil.

Where there is a net loss in a period, this amount is not deducted from group-EBITDA for the period. However, the net loss amount can be carried forward and treated as a relevant loss in the following period.

Relevant gains and losses

A relevant gain or loss arises in respect of a relevant asset in two situations:

Direct disposals (‘condition A’)

  • This applies where a member of the group disposes of the asset during the relevant period of account.
  • In this case, the relevant gain or loss is the amount of chargeable gain or allowable loss that would accrue to the member on disposal.

Indirect disposals (‘Condition B’)

  • This applies where a member of the group ceases to be a member during the relevant period of account and held the asset immediately before ceasing to be a member.
  • In this case, the relevant gain or loss is the amount of chargeable gain or allowable loss that would accrue to the member on disposal if the relevant asset were disposed of before the member ceased to be part of the group. The consideration to be treated as received is an amount attributable to the relevant asset on a just and reasonable basis by considering the consideration received by the group for disposing of its interests in the member.

Where a member of the group disposes of shares in another member, it is only the underlying assets that give rise to relevant gains and losses. The shares in a member of the group do not themselves give rise to relevant gains or losses.

The legislation is driven by the gain or loss that accrues on disposal of underlying assets in the period of account. As a result, even where the gain is deferred (for example under a hold-over relief claim), it is still taken into account in calculating group-EBITDA in the period in which the disposal occurs.

Assumptions

In calculating the amount of relevant gains or losses, the following assumptions are to be made:

  • All group members are within the charge to Corporation Tax.
  • The substantial shareholding exemption does not have any effect.
  • Any double taxation relief claim does not have any effect.