Introduction Background
9.Finance Act (FA) 2009 introduced a package of changes to the taxation of companies on their foreign profits. This package included a measure to restrict the interest and other finance expenses that can be deducted in computing the corporation tax payable by UK members of a worldwide group of companies. This is known as the debt cap.
10.The debt cap rules are now in Part 7 of TIOPA 2010. They broadly operate by requiring UK groups to compare their UK financing costs, as calculated under the rule, with the finance costs of their worldwide group. If the UK costs exceed the worldwide costs then the excess is disallowed and the UK companies do not get any relief for the excess.
11.Section 316 allows group treasury companies to make an election so that their financing expenses and financing income are excluded from the group’s debt cap computation. This was originally intended to relieve the administrative burden on groups in complying with the debt cap by applying to treasury companies acting as a conduit for borrowing and lending by the group. Such companies would have a relatively large number of transactions on which a small amount would be made, sufficient to meet the treasury company’s own finance costs.
12.It was possible for companies outside the original intention of the legislation to make a group treasury company election and so remove from the debt cap computation substantial amounts of financing expenses and financing income that would otherwise have been included. If the financing expenses and financing income were not included in the debt cap computation then they could not be subject to a debt cap disallowance or exemption. The changes made by this section ensure that the original intention of the legislation is restored.