CFM98250 - Interest restriction: carry forward rules: excess debt cap
TIOPA10/S400
Excess debt cap can arise where there is an interest disallowance in a period and the debt cap is not the limiting factor in computing a group’s basic interest allowance for a period. Excess debt cap can arise under both the fixed ratio method and the group ratio method.
Where the fixed ratio method applies, excess debt cap for a period of account is the fixed ratio debt cap as calculated by reference to on the group’s adjusted net group-interest expense (ANGIE) less the fixed ratio, 30%, of aggregate tax-EBITDA.
Where the group ratio method applies, excess debt cap for a period of account is the group ratio debt cap as calculated by reference to the group’s qualifying net group-interest expense (QNGIE), less the group ratio percentage of aggregate tax-EBITDA.
Unlike interest allowance, which can be carried forward up to five years, excess debt cap can only carry forward from one period to the next period. However, it can be seen below that the debt cap brought forward from the immediately preceding period may have the effect of increasing the amount that can be carried forward to the following period. As such, an amount of excess debt cap can, in effect, be carried forward indefinitely.
There is a limit on the amount of excess debt cap that can be carried forward - the carried forward limit. This is the sum of the total disallowed amount for that period, plus excess debt cap, if any, from the period immediately before the period of account. This therefore limits the increase in the excess debt cap that arises in a period to the amount of the disallowance that has arisen in the period.
The excess debt cap carry-forward is of practical significance for a group where the factor limiting interest allowance is sometimes the fixed ratio or group ratio percentage of aggregate tax-EBITDA, and sometimes the debt cap. Example 1 illustrates a scenario where in the first period of account, the limiting factor is aggregate tax-EBITDA multiplied by the fixed ratio, but in the second scenario, it would be the debt cap but for excess debt cap brought forward.
The excess debt cap is available in the next period even if the group switches from applying the fixed ratio method to the group ratio method, or vice versa. There is no need to recalculate the figure on a different basis when this happens - see Example 3.
The examples of carried forward debt cap also illustrate other aspects of the corporate interest restriction. For instance, the effect of the carried forward limit is that there will be excess debt cap brought forward to a period only and to the extent that there have previously been interest disallowances. So, if brought forward excess debt cap reduced the net disallowance for a period to zero, there are likely to be interest reactivations, as in Example 2 below
Compliance requirements
In most cases, excess debt cap will only be carried forward from a period in which there is either a disallowance or a reactivation and therefore for which a full interest restriction return is submitted. However, it is possible that excess debt will be carried forward in a period where a full interest restriction return is not required.
In such circumstances, if the group wishes to make use of excess debt cap in a subsequent period of account, it will need to provide a calculation of the excess debt cap available in the computations backing up the interest restriction return. If the excess debt cap has been growing in amount over a number of periods, this computation may need to reach back over a number of periods of account. But there will be no need to submit revised interest restriction returns for those periods because the numbers required to be disclosed on the statement of calculations for those years will not have changed. Where an estimate has been used then this should be disclosed in the return.
Examples
In these examples, the worldwide group draws up consolidated financial statements for the years ending on 31 March. There is no period of account straddling 1 April 2018 and first period to which the CIR applies is therefore the year to 31 March 2018. There are no amounts brought forward to that period.
Example 1
Excess debt cap carried forward from the period of account to 31 March 2018 reduces the disallowances that would otherwise have arisen in the period to 31 March 2019.
In the first period of account, the year to 31 March 2018, a group’s position is as follows:
- There are no amounts brought forward.
- Its aggregate tax-EBITDA is £1,000m.
- Its ANTIE (aggregate net tax-interest expense) is £310m.
- Its ANGIE (adjusted net group-interest expense) is £320m.
- Its QNGIE (qualifying net group-interest expense) is £285m (£35m of tax-interest expense on related party debt is excluded).
- Its group ratio percentage is 33%.
As no amounts were brought forward from an earlier period, the carry forward limit is equal to the total disallowed amount for the period.
The group ratio is not advantageous because QNGIE would then become the limiting factor; it is less than 30% of aggregate tax-EBITDA, whereas ANGIE is greater than this amount.
Accordingly, the fixed ratio at 30% of aggregate tax-EBITDA of £1,000m becomes the limiting factor. The total disallowed amount and excess debt cap are then:
| Year to 31 March 2018 (Examples 1, 2 and 3 are the same in this period) | ||
|---|---|---|
| ANTIE (TI) | - | £310 million |
| Fixed ratio, 30% of aggregate tax-EBITDA (FE) | £300 million | - |
| Debt cap (DC) = ANGIE (A) | £320 million | - |
| Less, interest capacity (IC), in this case with no allowance for earlier years equal to the interest allowance, the lower of the two | - | £300 million |
| Total disallowed amount: TI minus IC | - | £10 million |
| Aggregate disallowed amounts available for group companies to c/f | - | £10 million |
| Excess debt cap (EDC) before c/f limit: DC minus FE | £20 million | - |
| Compute debt cap c/f limit: | - | - |
| Total disallowed amount for period | £10 million | - |
| Debt cap b/f | nil | - |
| C/f limit (CFL) | £10 million | - |
| Excess debt cap c/f: lower of EDC and CFL | - | £10 million |
In the second period of account, the year to 31 March 2019, the group’s position is as follows:
- There are no changes to the composition of the group and all company accounting period coincide with the worldwide group’s period of account.
- Aggregate of disallowed amounts carried forward by group companies, £10 million, as above.
- Excess debt cap brought forward is £10 million, as above.
- Its aggregate tax-EBITDA is £900m million.
- Its ANTIE (aggregate net tax-interest expense) is £273 million.
- Its ANGIE (adjusted net group-interest expense) is £265 million.
- Its QNGIE (qualifying net group-interest expense) is £241 million (£24 million of tax-interest expense on related party debt is excluded).
- Its group ratio percentage is 25%.
In this year a group ratio election is not beneficial:
| Year to 31 March 2019 (Example 1) | - | - |
|---|---|---|
| ANTIE | - | £273 million |
| Fixed ratio, 30% of aggregate tax-EBITDA (FE) | £270 million | - |
| ANGIE (A) | £265 million | - |
| Excess debt cap b/f (EDCBF) | £10 million | - |
| Debt cap (DC) = A plus EDCBF | £275 million | - |
| Interest capacity (IC), (lower of the two) | - | £270 million |
| Total disallowed amount | - | £3 million |
| Aggregate of disallowed amounts c/f by group companies (including £10m b/f) | - | £13 million |
| Excess debt cap (EDC) before c/f limit, DC minus FE | - | £5 million |
| Compute debt cap c/f limit | - | - |
| Excess debt cap b/f | £10 million | - |
| Total disallowed amount | £3 million | - |
| C/f limit (CFL) | £13 million | - |
| Excess debt cap c/f: lower of EDC and CFL | - | £5 million |
All that has happened is that £5 million of debt cap brought forward has been used up in the period to 31 March 2019. Without the amount brought forward, there would have been a £5 million larger disallowance, £8 million (£273 million minus £265 million ANGIE), because the debt cap rather than the fixed ratio would then have been the limiting factor.
Example 2
In this example, excess debt cap carried forward from the period of account to 31 March 2018 reactivates additional disallowed amounts carried forward. There is also a residue of unused interest allowance available for later periods.
For the year to 31 March 2018, the position is as in Example 1.
In the year to 31 March 2019, it is now as follows:
- There are no changes to the composition of the group and all company accounting period coincide with the worldwide group’s period of account.
- Excess debt cap brought forward is £10 million, as in Example 1.
- Aggregate of disallowed amounts carried forward by group companies, £10 million, as in Example 1.
- Its aggregate tax-EBITDA is £900 million.
- Its ANTIE (aggregate net tax-interest expense) is £259 million.
- Its ANGIE (adjusted net group-interest expense) is £265 million.
- Its QNGIE (qualifying net group-interest expense) is £241 million (£24 million of tax-interest expense on related party debt is excluded).
- Its group ratio percentage is 25%.
- In this year the group ratio percentage is less than 30%, so a group ratio election is obviously not beneficial and the level of QNGIE is not relevant.
The position is then as follows:
| Year to 31 March 2019 (Example 2) | - | - |
|---|---|---|
| ANTIE | - | £259 million |
| 30% of aggregate tax-EBITDA (FE) | £270 million | - |
| ANGIE (A) | £265 million | - |
| Excess debt cap b/f (EDCBF) | £10 million | - |
| Debt cap (DC) = A plus EDCBF | £275 million | - |
| Interest capacity = interest allowance (lower of the two) | - | £270 million |
| Total disallowed amount | - | nil |
| Interest reactivation cap, S373(3) = interest allowance, £270 million, less ANTIE for the period of account, £259 million | - | £11 million |
| Disallowed interest b/f (less than interest reactivation cap, so all of it can be reactivated - S379) | £10 million | - |
| Interest allowance remaining unused after reactivation £270m, minus £259m (S394(2)(b)(i)), minus £10m (S394(2)(b)(ii)). | - | £1 million |
| Excess debt cap (EDC), DC minus FE | - | £5 million |
| Compute debt cap c/f limit | - | - |
| Debt cap b/f | £10 million | - |
| Total disallowed amount | nil | - |
| C/f limit (CFL) | £10 million | - |
| Excess debt cap c/f: lower of EDC and CFL | - | £5 million |
In the absence of the debt cap brought forward, the interest allowance for the period would have been lower, because the limiting factor would have been ANGIE, £265 million, as against 30% of aggregate tax-EBITDA, £270 million. There would have been no disallowance in the current year, because the interest allowance would still have exceeded the ANTIE of £259 million.
However, the interest reactivation cap would then have been £6 million (interest allowance £265 million - equal to ANGIE, in the absence of excess debt cap brought forward - minus ANTIE, £259 million) - rather than £11m. Accordingly only £6 million of disallowance brought forward could have been reactivated, leaving £4 million for UK group companies to carry forward to the next period.
The effect of the brought forward excess debt cap was a follows:
- There is no interest disallowance in the current year with or without the excess debt cap brought forward.
- However, the excess debt cap brought forward increased the disallowed interest brought forward that can be reactivated by £4 million from £6 million to £10 million, and there is still unused interest allowance of £1 million available to carry forward to later periods (instead of none). In this way, it is possible for excess debt cap brought forward to a period of account to indirectly increase the interest allowance carried forward.
- Accordingly, the overall benefit is £5 million, and the excess debt cap carried forward to the next period of account is now £5 million, as against £10 million brought forward from the previous period.
Example 3
This example illustrates excess debt cap arising under the fixed ratio method in one year and the group ratio method in the next.
For the year to 31 March 2018, the position is as in Example 1.
In the year to 31 March 2019, it is now as follows:
- There are no changes to the composition of the group and all company accounting period coincide with the worldwide group’s period of account.
- Excess debt cap brought forward is £10 million, as in Example 1.
- Aggregate of disallowed amounts carried forward by group companies, £10 million, as in Example 1.
- Its aggregate tax-EBITDA is £700 million.
- Its ANTIE (aggregate net tax-interest expense) is £300 million.
- Its ANGIE (adjusted net group-interest expense) is £285 million.
- Its QNGIE (qualifying net group-interest expense) is £284 million (£1 million of tax-interest expense on related party debt is excluded).
- Its group ratio percentage is 40%.
The position is then as follows:
| Example 3 | - | - |
|---|---|---|
| ANTIE | - | £300 million |
| 30% of aggregate tax-EBITDA | £210 million | - |
| ANGIE | £285 million | - |
| Group ratio percentage (40%) x ANTIE (GE) | £280 million | - |
| QNGIE | £284 million | - |
| Group ratio election made | - | - |
| Excess debt cap b/f (EDCBF) | £10 million | - |
| Debt cap (DC = QNGIE + EDCBF) | £294 million | - |
| Interest capacity = interest allowance (lower of the two) | - | £280 million |
| Total disallowed amount | - | £20 million |
| Restricted interest c/f by UK group companies (£10m b/f + £20m) | - | £30 million |
| Excess debt cap (EDC), DC minus GE | - | £14 million |
| Compute debt cap c/f limit | - | - |
| Debt cap b/f | £10 million | - |
| Total disallowed amount 2019 | £20 million | - |
| C/f limit (CFL) | £30 million | - |
| Excess debt cap c/f: lower of EDC and CFL | - | £14 million |
The key point here is that the excess debt cap is not specific to either the fixed ratio method or the group ratio method. It can be used to increase the debt cap limit in either case, depending on which method the group chooses to use in a particular period.
This example also shows how the legislation allows the excess debt cap to grow cumulatively in cases where a group suffers an interest disallowance each year but this is not due to the debt cap limit.