Part 7 of the Taxation (International and Other Provisions) Act 2010 (chapter 8 of 2010) (TIOPA 2010) contains provisions relating to the tax treatment of financing costs and financing income. Part 7 includes provisions which set a ceiling (known as the 'available amount') on the total interest and other specified financing expenses for which Corporation Tax deductions are available to a group of companies. The purpose of these regulations is to allow a wider range of financing expenses to be taken into account in calculating the available amount.
Part 7 of TIOPA 2010 is one element of a package of measures introduced as part of the government’s review of the taxation of the foreign profits of companies.
The amount of interest and other financing expenses (the available amount) that a group of UK companies (including permanent establishments of non-resident companies that are trading in the UK) may bring into account for the purpose of calculating their profits for Corporation Tax purposes is calculated by reference to the worldwide group to which the UK companies belong. The worldwide group may consist solely of UK companies and the UK permanent establishments of non-UK resident companies or it may include non-resident companies which do not have UK permanent establishments.
The available amount for the period of account of the worldwide group is the sum of the amounts disclosed in the financial statements of the group for that period. Section 332(1) of TIOPA 2010 describes those matters in respect of which amounts are included within the available amount. Subsection (1)(g) provides that HM Revenue & Customs may specify other descriptions of matters. These regulations do that.
There are a number of arrangements which, although they are not loans in legal form, have the economic effect of loans and are treated for the purposes of Corporation Tax in the same way as loans. These include alternative finance arrangements (Islamic finance), sale and repurchase arrangements and certain structured finance arrangements. Debts that arise from the supply of goods or services, rather than from lending money, are similarly treated.
A company entering into such an arrangement as the 'borrower' will normally be allowed a tax deduction for amounts payable by it that are equivalent to interest, and such amounts will form part of the UK financing expenses taken into account under Part 7 of TIOPA 2010. These regulations provide that the same amounts are also taken into account in computing the available amount, thus ensuring that the comparison between UK and worldwide financing costs is made on a fair basis.
The regulations provide that amounts payable in respect of the specified matters are included in the available amount, provided that they satisfy two general conditions. They are that the amount is actually deductible for tax purposes by a UK company within the scope of Part 7 of TIOPA 2010 and is shown as a cost of finance in the consolidated accounts of the worldwide group. The latter condition means that amounts relating to intra-group arrangements, which are eliminated on consolidation, will not be included in the available amount.
Comments on the draft regulations should be emailed to the following HMRC contacts by 22 October 2010.