CFM96660 - Interest restriction: alternative calculations: interest allowance (alternative calculation) election: changes in accounting policy

TIOPA10/S426

The default approach for calculating group-interest and group-EBITDA is based closely on the amounts recognised in the group’s financial statements. Where, however, the group has made an interest allowance (alternative calculation) election certain adjustments are made to the default approach to align the calculations more closely with the UK tax rules.

One such adjustment that is made under this election is that the finance statements of the group are treated so to include adjustments from any change in accounting policy of the group.

Background

Many parts of the corporation tax rules are based on amounts recognised in a company’s accounts. Where, however, there is a change in accounting policy used by a company from one period to the next, there is a risk that amount of profits or losses could fall to be brought into account more than once or not at all.

To address this, the tax rules which are based on the accounting treatment typically have special rules to bring additional amounts into account on transition to the new accounting policy.

Effect of the election

This is achieved by considering the position that the group would be in if the whole group was a single company within the charge to corporation tax and held the same assets and liabilities, and carried on the same activities, as the group undertakes.

Adjustments are made to the group’s finance statements in line with the effect of the change in accounting policy provisions for:

• Trading profits
• Loan relationships
• Derivative contracts
• Intangible fixed assets

Note that the references to the loan relationships and derivative contracts provisions include the effect of the Change of Accounting Policy Regulations 2004.

For periods of account beginning on or after 1 January 2019, S426 is amended to make clear that groups only need to consider the various change of accounting practice rules where there has been an actual change of accounting practice.

Example

The group holds a loan receivables of £100m, against which it holds impairment allowances of £10m as at 31 December 2017. In 2018, it adopts IFRS 9 and as a result increases the opening impairment allowances to £15m as at 31 December 2017.

In line with the application of the loan relationship rules and the Change of Accounting Policy Regulation 2004, as they would apply if the group was a single company, the transitional adjustment of £5m should be treated as being brought into account over a ten year period starting in 2018.

As a result, the net group-interest expense figures will be treated as increased by £500,000 each year over that ten year period.