IFM40680 - Other tax issues: corporate interest restriction: non-consolidation of certain subsidiaries

FA22/SCH2/PARA42

The Corporate Interest Restriction (CIR) in TIOPA10/PT10 restricts a group’s deductions for interest expense, and other financing costs, to an amount which is commensurate with its taxable activities in the UK. Guidance on these rules can be found at CFM95000+.

One of the key considerations when applying the rules is identifying the worldwide group, specifically which entities are included within it (CFM95320). The rules defining the composition of the worldwide group for CIR purposes are amended in two ways for a QAHC to ensure they continue to operate as intended. The first rule is explained below. The second rule is addressed at IFM40690.

Non-consolidation of certain subsidiaries

PARA 42 allows certain subsidiaries, which would otherwise be included in the same worldwide group as the QAHC, to form their own, separate worldwide group. The rule is aimed at investments made by the QAHC which are managed independently from any other person or entity. Including such investments in a worldwide group alongside other entities with which they share no common management would not give the correct result.

The rule works by identifying a subsidiary of the QAHC (‘S’) and applies where:

• S is held as a ‘market value investment’ by the QAHC;
• the management of S, and its subsidiaries, is not coordinated to any extent with the management of another person or entity;
• absent PARA 42, S would be included in the same worldwide group as the QAHC.

Where these conditions are met, the worldwide group of which the QAHC is a member cannot include S or its subsidiaries. Instead, S and its subsidiaries will form their own worldwide group with S as the ultimate parent of this new group.

S will be held as a ‘market value investment’ where it is held as an investment by the QAHC, the value of which is judged by the QAHC by reference to its market value. HMRC accepts that an investment held at fair value for accounting purposes is likely to meet this definition.

Example

A QAHC invests in two independent groups (‘A Group’ and ‘B Group’) by acquiring 100 percent of the share capital in the top company of each group (‘A Ltd’ and ‘B Ltd’). The accounting treatment means that, under the general rules in TIOPA10/PT10, the worldwide group would include the QAHC, A Ltd, B Ltd and any subsidiaries held by A Ltd or B Ltd. Whether either group gets a tax deduction for their own financing costs will therefore be contingent on the other group with which they are unconnected. So, Group A could have a CIR disallowance simply because Group B is highly geared and has excessive financing costs.

Provided that A Ltd and B Ltd are held by the QAHC as a market value investment, and the management of each of the A Group and B Group is not coordinated with any other person, each group will be able to form their own worldwide group. There will therefore be three worldwide groups under PARA 42. One containing the QAHC, one containing A Ltd and all A Group subsidiaries, and one containing B Ltd and all B Group subsidiaries. A Ltd and B Ltd will be the ultimate parents of their respective worldwide groups.

Example

On the example above, the management of A Group and B Group is likely to be coordinated if a manager holds positions in both groups. There would also likely be coordination if there was any communication between a management team in Group A and a management team in Group B. The point here is that each group needs to be acting independently in order to form its own worldwide group.