CFM96630 - Interest restriction: alternative calculation: interest allowance (alternative calculation) election: overview

TIOPA10/SCH7A/PARA16

A reporting company can make an election in a worldwide group’s interest restriction return to apply alternative calculations provisions when calculating group-interest and group-EBITDA. The effect of these provisions is to bring the amounts used when calculating these figures in line with UK tax principles for a number of areas.

This should lessen the risk of disallowances being increased by mismatches between accounting and UK tax rules. However, it will tend make compliance more complicated, because adjustments must typically be made even where the group member concerned is not subject to corporation tax. In such cases it is necessary to replace amounts disclosed in the group’s financial statements by the amounts that would have been taken into account, had the company been subject to corporation tax.

This election affects the period of account of the worldwide group for which the reporting company is appointed as well as any subsequent periods of account and is irrevocable. There are transitional rules regarding elections in place following the introduction of S424A – see CFM98460.

As the election only affects group-interest and group-EBITDA, it will only make a difference to:

• calculating adjusted net group-interest in applying the debt cap; and
• applying the group ratio method.

This election affects the following areas:

• Capitalised interest for GAAP-taxable amounts
• Employers’ pension contributions
• Unpaid employees’ remuneration
• Employee share acquisitions
• Changes in accounting policy