CFM97270 - Interest restriction: public infrastructure: meaning of insignificant for members of a joint election

TIOPA10/S435(5)

Where a company has made an election to be a qualifying infrastructure company which has effect for an accounting period, but it is also a member of a joint infrastructure election which has effect for that same accounting period, in determining whether something is “insignificant”, each company in the joint election is deemed to have all the income and assets of their fellow members (on a consolidated basis).

Example 1

Assumed facts:

  • Company A has two wholly owned subsidiaries, Company B and Company C.
  • Company A has no other assets than its shares in these companies, and no income other than dividends receivable as a result of holding these shares.
  • Company B’s only assets are shares in ten special purpose companies holding qualifying infrastructure companies. Its only income is the dividends receivable as a result of its holding these shares.
  • Company C has two assets. The first, a waste plant, has been constructed as a result of a contract with a local authority to collect and process household waste – the capacity of this plant is limited to the waste it has to collect under this contract. The second, a brick factory, has been constructed by C such that it can seek out alternative commercial contracts.

In isolation, Company C would fail the public infrastructure income and assets test in the twelve-month accounting period ending 31 December 2019 on the basis that its commercial manufacturing operations form approximately 10% of its income and assets for that period.

Company B would pass these same tests for that period, on the basis that all of its income and assets derive from shares in qualifying infrastructure companies.

However, if both Company B and Company C made elections to be qualifying companies, and they make a joint infrastructure election, both could pass the public infrastructure income and asset tests. Company C’s income and assets from its commercial manufacturing operations would be insignificant relative to Company B and its subsidiaries.

If Company A were also a member of the joint infrastructure election group, only dividends receivable in Company B from companies external to the joint infrastructure election group would be taken into account; any dividends receivable by Company A from Company B would be excluded to prevent double counting.

Example 2

A company is incorporated as a special purpose company (SPC) to bid for a private finance initiative (PFI) contract to design, build, finance, maintain and operate a waste facility.

When the waste facility is complete. The SPC recognises £80m from its PFI contract with the local authority. It also generates £4m interest income from lending to its shareholders. The latter is not considered derived from a qualifying infrastructure activity. The £4m is significant both in absolute terms and relative to the £80m generated from its PFI contract. Consequently, on a standalone basis, the public infrastructure income test is failed.

However, the SPC is a member of a group with other qualifying infrastructure companies. A joint infrastructure election is made, as a result of which the total income derived from qualifying infrastructure activities is £300m. The £4m interest income in the SPC is now “insignificant” for the public infrastructure income test.