OT21206 - Corporation Tax Ring Fence and Supplementary Charge

Supplementary Charge: Meaning of “Finance Costs”: ICTA88/s501A(4)-(7)

Financing costs are defined in ICTA88/s501A(4) and (5) to be the costs of debt finance, including

• loan relationship debits in respect of debtor relationships
• forex differences arising in relation to debt finance
• trading profits or losses on derivative contracts in relation to debt finance
• the financing cost implicit in a payment under a finance lease
• any other costs arising from what would be considered a financing transaction in accordance with generally accepted accounting practice (GAAP).

The definition is drawn very widely.

Finance Leases

Certain costs related to finance leases are also treated as finance costs for calculating the adjusted ring fence profits of a company. ICTA88/s501A(6) deals with a situation whereby an amount is not treated as a finance charge under a finance lease in the company's accounts but

• is treated as a finance charge in group accounts, or
• would be treated as a finance charge if the group accounts were drawn up in accordance with GAAP.

Such an amount is to be treated as a financing cost implicit in a payment under a finance lease and hence a cost of debt finance.

This provision is aimed primarily at companies or groups that are not required to draw up their accounts under UK GAAP because, for example, they are non-resident. Where appropriate, this means the question of whether an amount is a finance charge is to be determined by reference to hypothetical group accounts drawn up in accordance with GAAP.

Recovery of Finance Costs

Where finance lease costs have been disallowed, then any repayment of them is left out of account in computing adjusted ring fence profits - ICTA88/s501A(7).

What is meant by “finance lease” and “accounts” is defined in ICTA88/s501A(8) to (10) – see OT21209 below.

Any examples of costs, which the Inspector considers ought to be regarded as financing costs but are claimed to be outside the scope of this definition, should be referred to an Assistant Director.