Introduction Details of the Schedule Part 7 – Financing expense amounts and financing income amounts
117.Part 7 provides what is meant by the ‘financing expense amount’ and ‘financing income amount’ of a company. These amounts are used in Part 8 to compute the ‘tested expense amount’ and ‘tested income amount’, which in turn are used, together with the ‘available amount’ (defined in Part 9) to calculate the amounts, if any, of the financing expense incurred by ‘relevant group companies’ to be disallowed and of the financing income receivable by UK group companies to be exempted. In setting the basic rules for the ‘financing expense amount’ and the financing income amount’, Part 7 includes specific rules for finance amounts arising in relation to certain activities or certain types of finance amount.
118.Paragraph 54(1) provides that a ‘financing expense amount’ of a worldwide group company for a period of account is an amount which meets one of three conditions set out in sub-paragraphs (2) to (5).
119.Sub-paragraphs (2) and (3) set condition A. Condition A is that the amount is a debit (broadly an expense) which, in the absence of the Schedule, would be brought into account for corporation tax purposes under the trade loan relationship rules in Corporation Tax Act 2009 (CTA) and which are not one of the specified excluded debits.
120.Sub-paragraph (4) deals with condition B. Condition B is that the debit is an amount which, in the absence of the Schedule, would be brought into account as a financing cost under a finance lease.
121.Sub-paragraph (5) describes condition C. This condition is that the debit is an amount which, in the absence of the Schedule, would be brought into account as a financing cost of debt factoring or a similar transaction.
122.Sub-paragraph (6) ensures that the debit or amount is reduced proportionately where the period in which it would, apart from this Schedule, be taken account of is not the same length as that of the worldwide group. Where the relevant accounting periods of the company straddle the period of account of the worldwide group, then the amounts in question are reduced proportionately.
123.Sub-paragraph (7) makes this paragraph subject to the specific rules provided by the rest of Part 7.
124.Paragraph 55 provides that, other than for the purposes of Part 5, the ‘financing income amount’ of a worldwide group company for a period of account is an amount which meets one of three conditions set out in sub-paragraphs (2) to (5). The three conditions essentially mirror the conditions for ‘financing expense amount in the previous paragraph.
125.Sub-paragraphs (2) and (3) set condition A. Condition A is that the amount is a credit (broadly income or a receipt) which would be brought into account for corporation tax purposes under the loan relationship rules in CTA and which is not one of the specified excluded credits.
126.Sub-paragraph (4) sets condition B. An amount must be an amount which would be brought into account as finance income received under a finance lease.
127.Sub-paragraph (5) sets condition C. The condition is that the amount must be an amount would be brought into account as finance income from debt factoring or a similar transaction.
128.Sub-paragraph (6) ensures that the credit or amount is reduced proportionately where the period in which it would, apart from this schedule, be taken account of is not the same length as that of the worldwide group. Where the relevant accounting periods of the company straddle the period of account of the worldwide group, then the amounts in question are reduced proportionately.
129.Sub-paragraph (7) makes the paragraph subject to the specific rules of the remainder of Part 7.
130.Paragraph 56 sets out that various terms used in paragraph 54 and 55 have the same meaning as they do in the loan relationships rules in CTA.
131.Paragraphs 57 to 69 are intended to remove particular financing expense or income amounts, referred to as the ‘relevant amounts’ within the meaning of paragraphs 54 and 55 from the calculation of a company’s net financing deduction (or in some cases net financing income) where certain conditions are met.
132.Paragraph 57 excludes the financing expense or income amounts where the company is a group treasury company during the worldwide group’s period of account, and the company so elects within three years of the end of that period
133.Sub-paragraph (4) provides where in a period the worldwide group contains more than one group treasury company, an election for the group treasury exclusion will not be valid unless each of those companies makes an election.
134.Sub-paragraphs (5) to (8) establish that a series of conditions must be met before a company can qualify as a group treasury company. Broadly, the company must;
	be a member of the worldwide group
	undertake treasury activities for that group
	where the company is the only UK group company to be a group treasury company during that period 90 per cent of the gross income from its activities (its relevant income) must be group treasury revenue, and
	where the company is not the only UK group company to be a group treasury company during the period the 90 per cent test must be applied to the aggregate gross income of the treasury companies.
135.Sub-paragraph (9) identifies the activities that must be undertaken during a period in order that a company can qualify as a group treasury company.
136.Sub-paragraphs (10) and (11) define ‘group treasury revenue’, while sub-paragraph (12) defines, amongst other things, ‘relevant income’. The amounts are those that are accounted for using general accepted accounting practice (which is defined in section 50 FA 2004). Dividends or other distributions are not treated as group treasury revenue unless they are received from another UK group treasury company.
137.Paragraph 58 excludes financing expense amounts and financing income amounts where they are taken into account in computing profits exempted from tax by virtue of the special rules applying to Real Estate Investment Trusts. The condition for exclusion is that the financing expense amounts and financing income amounts are brought into account in computing the profits of a tax-exempt business by virtue of section 120(3)(a) Finance Act 2006.
138.Paragraph 59 excludes the financing expense or income amounts where the company is engaged in oil extraction activities within the meaning of section 502, ICTA and where the amounts in question are taken into account in calculating the company’s trading profits.
139.Paragraph 60 deals with intra-group short-term financing expense. It only applies to an amount which is a finance expense of a company meeting condition A in paragraph 54. In such cases sub-paragraph (2)-(5) provide for an election for the amount not to be included as a finance expense, provided that:
	company A and the other party to the loan relationship (company B) are both members of the worldwide group, and
	the expense relates to a short-term loan relationship as defined in paragraph 62.
140.Sub-paragraph (6) requires the election to be made jointly by companies A and B within 36 months of the end of the accounting period to which the relevant amount relates. Sub-paragraph (7) provides for the election to be irrevocable.
141.Paragraph 61 deals with intra-group short-term financing income. It only applies where a finance expense amount is not treated as such by company A in accordance with paragraph 44. It is a reciprocal provision which ensures that the finance income amount of the other party to the loan (‘company B’) is not treated as a finance income amount.
142.Paragraph 62 provides what finance arrangements can be treated as short-term loan relationships for the purposes of this Schedule.
143.Sub-paragraph (1) defines a finance arrangement to be a short-term loan relationship if it meets either conditions set out in regulations, or meets one of the conditions provided by sub-paragraphs (2) to (3). The broad effect of these sub-paragraphs is to include loan relationships that are either required from the outset to last for less than twelve months, or where there is no fixed term, are considered to no longer exist within 12 months. A loan relationship with no fixed term can only be treated as a short-term loan relationship once it has been repaid and its character as short-term determined.
144.Sub-paragraphs (4) to (6) provide a Treasury power to make regulations, subject to affirmative resolution, about the circumstances in which finance arrangements will not be considered short-term loan relationships.
145.Sub-paragraph (7) provides a regulating power to allow the Commissioners to introduce rules that will enable minor breaches of the regulations introduced under sub-paragraph (4) to be disregarded.
146.Paragraph 63 deals with stranded deficits in non-trading loan relationships from the perspective of the company incurring the financing expense. It only applies to an amount which is a financing expense of a company meeting condition A in paragraph 54. In such cases sub-paragraph (2) provides for an election for the amount not to be included as a finance expense amount if the following conditions, set by sub-paragraphs (4)-(7) are met;
	the other party to the loan relationship (‘company B’) is in the same worldwide group as company A;
	company B is either resident in the United Kingdom (UK) or trading in the UK through a branch;
	company B is carrying forward an amount of non-trading deficit and sets it off against the non-trading profits of a period which overlaps with the worldwide group’s period of account, and;
	The amount set off is equal to or greater than the amount excluded under this paragraph.
147.Sub-paragraph (8) provides that the election is to be made jointly by companies A and B within 36 months of the end of the accounting period to which the relevant amount relates.
148.Paragraph 64 is a reciprocal provision to paragraph 63 dealing with stranded deficits in non-trading loan relationships from the perspective of the company receiving financing income. It ensures that relevant financing income of Company B which meets Condition A in paragraph 55 is not treated as an amount of finance income where Company A elects to exclude the expense.
149.Paragraph 65 makes provision for stranded management expenses in non-trading loan relationships from the perspective of the company incurring the financing expense. The paragraph applies only to an amount which is a finance expense of a company meeting Condition A in paragraph 54. In such cases sub-paragraph (2) provides for an election for the amount not to be included as a finance expense if the following conditions, set by sub-paragraphs (4)-(8) are met;
	the other party to the finance arrangement (‘company B’) is in the same worldwide group as company A;
	company B must have an investment business and be either resident in the UK or trading in the UK through a branch;
	company B is allowed a deduction for management expenses under section 1219 CTA in an accounting period which overlaps with the worldwide group’s period of account;
	the amount of the deduction is equal to or greater than the relevant amount, and;
	company B would make a loss for corporation tax purposes in that accounting period if the credit corresponding to company A’s debit within paragraph 54 is not included in that computation.
150.Sub-paragraph (9) provides that the election must be made jointly by companies A and B within 36 months of the end of the accounting period to which the relevant amount relates.
151.Paragraph 66 is a reciprocal provision to paragraph 65 and deals with stranded management expenses in non-trading loan relationships from the perspective of the company receiving the financing income. It ensures that relevant financing income of company B which meets condition A in paragraph 55 is not treated as an amount of finance income where company A elects to exclude the expense.
152.Paragraphs 67 and 68 exclude relevant amounts paid to charities, designated educational establishments, health service bodies and local authorities from being taken into account in computing any disallowance under the Schedule. This prevents a disallowance being made where a corresponding disregard of amounts receivable is not available because of the tax status of the receiving body.
153.The definition of ‘charity’ is given as any body of persons or trust established for charitable purposes only. The meanings of ‘designated educational establishment’ and ‘health service body’ are given by section 105 of CTA and section 519A of ICTA respectively.
154.The provisions include a regulation-making power to allow the Commissioners to add other public bodies to the list of entities to which payments will be disregarded.
155.Paragraph 69 provides certain defined terms for the purposes of Part 7.