TTM07400 - The ring fence: Finance costs
Outline of finance cost adjustment
TM07020 explains that a company's tonnage tax activities are treated as if they are a separate trade.
In the absence of a special rule to prevent it, a company could arrange for all of its debt to be carried in the non-tonnage tax trade, obtaining a tax deduction for all the costs of debt finance, with its tonnage tax trade funded by share capital.
Likewise, in a tonnage tax group, those companies within the ring fence could be funded very largely by share capital, whilst tax-deductible debt is used to fund those companies outside the ring fence.
Thick capitalisation rules
To prevent this type of manipulation of the different types of funding between a company's or group's tonnage tax and non-tonnage tax activities, there are special rules in FA00/SCH22/PARA61 onwards. These are sometimes referred to as the ‘thick capitalisation’ rules.
Adjustments on a just and reasonable basis
The underlying rule is that, if the finance costs charged outside the ring fence exceed a just and reasonable proportion of the total finance costs, the excess is brought into account outside the ring fence as additional non-trading loan relationship credits on the tonnage tax companies.
See TTM07420 for singleton companies and TTM07430 for groups.
Meaning of finance costs
The definition of finance costs is widely drawn, and will include all costs arising from what would be considered on normal accounting principles to be a financing transaction, see TTM07410.
References
| FA00/SCH22/PARA61 (treatment of finance costs; single company) | TTM17346 |
| FA00/SCH22/PARA62 (treatment of finance costs; group company) | TTM17351 |
| FA00/SCH22/PARA63 (meaning of finance costs) | TTM17356 |