GREIT12150 - Group conditions and rules: Financial Statements: financing costs

Paragraph 14 Schedule 17 FA 2006 uses amounts called Financing Costs (All) and Financing Costs (External) as part of the interest cover test in section 115, as modified for groups. These amounts are derived from the three sets of financial statements. How they are defined and computed is explained below and at GREIT12155.

'Financing costs' are defined in section 115(4) FA 2006 and include finance leasing costs as well as interest – see GREIT02200 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.

Where a Joint Venture Look-Through notice is in place between a venturing company and a joint venture company, the interest cover test for the UK-REIT is modified by regulation 6(4) SI 2006/2866. This replaces the formula in section 115(2) FA 2006 to take account of the financing costs associated with the joint venture company (see GREIT13035). The same steps as described in GREIT12155 for working out Financing Costs (External) apply.

Financing Costs (All)

This amount is worked out from the financial statements for G (tax-exempt). The statement has to show financing costs separately from other expenses (regulation 5(2) SI 2006/2865. The aggregate of the financing costs (as measured for tax purposes) of the tax-exempt business of each member of the group is Financing Costs (All).

For example, A is the principal company of a Group REIT and B is a wholly-owned subsidiary. The income from A’s property rental business is 500 and from B’s is 600. A has borrowed 1,000 from a bank at 4% and has lent 400 of this to B at 5%. B has also borrowed 300 from a bank, also at 5%. Financing Costs (All) is the sum of A’s interest that relates to its tax- exempt business (bank loan 600 @ 4%) and B’s interest that relates to its tax-exempt business (loan from A 400 @ 5% + bank loan 300 @ 5%) = 24 + 20 + 15 = 59.