IFM22350 - Real Estate Investment Trust : Group conditions and rules: Financial Statements: financing costs
The profit finance cost ratio in CTA2010/S543 uses finance costs derived from the financial statements. How they are defined and computed is explained below and at IFM22355.
‘Financing costs’ are defined in CTA2010/S544(4) and include finance leasing costs as well as interest – see IFM22200 for more detail.
Joint ventures
Where there is a Joint Venture Look-Through notice in place between a venturing group and a joint venture company, the financing costs relating to the joint venture company are included in Financing Costs (All) and Financing Costs (External) in the same way as they are for members of the Group REIT.
Financing Costs for CTA2010/S543
The statement for the property rental business (CTA2010/S532(2)(a)) must show ‘financing costs external’ separately from other expenses (SI 2006/2865 Reg 5(5)). Financing costs external are defined at SI2006/2865 Reg 6 and include the external financing costs referable to the UK PRB. It is these financing costs that are included in the profit : financing costs ratio test.
The aggregate of the financing costs (as measured for tax purposes) and referable to the UK PRB of each member of the group is included in the financial statement under CTA2010/S532(2)(b).
Example
Company A is the principal company of a Group REIT and Company B is a wholly-owned subsidiary.
A has borrowed 1000 from a bank at 4%, financing its non-UK PRB with 200, UK PRB with 400 and lending 400 to B at 5%. B has also borrowed 300 from the bank at 5%, all borrowing to fund its UK PRB.
The Financing costs stated separately on the statement of PRB under CTA2010/S532(2)(a) are the financing costs paid to non-group entities and referable to the UK PRB :-
A’s interest expense is 32 (bank loan of 400 @ 4% (referable to A’s UK PRB) + 400 @4% (bank loan lent to B and referable to B’s UK PRB)).
B’s interest expense is 15 (300 loan from bank @ 5%)
Therefore financing costs for profit :financing cost ratio is 47
The financing costs included in the financial statement under CTA2010/S532(2)(b) includes finance costs for each group member UK PRB (as measured for tax purposes):
A’s interest expense is 16 (bank loan of 400 @ 4% (referable to A’s UK PRB).
B’s interest expense is 35 (300 loan from bank @ 5% plus 400 loan from A @ 5%)
Therefore financing costs included in the financial statement of the UK PRB (providing the profit figure for the distribution condition (CTA2010/S530 see IFM22050) is 51.