Section 44: Financing Costs and Income: Group Treasury Companies
Summary
1.Section 44 amends the provisions in Part 7 of the Taxation (International and Other Provisions) Act 2010 (TIOPA) on the treatment of financing expenses and financing income (the debt cap). It makes changes to the conditions that companies have to satisfy in order to make an election under section 316 TIOPA 2010 and to how the election applies to financing expenses and financing income.
Details of the Section
2.Subsection (1) substitutes new subsections (2) to (7) for subsections (2) to (8) of section 316 TIOPA 2010. New subsection (2) introduces a new criterion in addition to the three existing criteria for a company to be a group treasury company. The new criterion is that the company has made an election under section 316.
3.New subsection (3) provides that new subsection (4) applies to a company if all or substantially all of its activities are treasury activities and all or substantially all of its assets and liabilities relate to such treasury activities.
4.New subsection (4) provides that the relevant amount or relevant amounts of the company for the period of account of the worldwide group are not treated as financing expenses or financing income of the group treasury company. The effect of this is that the financing expenses and financing income of the group treasury company are not included in the group’s debt cap computation.
5.If new subsection (4) does not apply, for example because the company cannot meet the provisions of new subsection (3) throughout the relevant period or the company’s activities are not substantially all treasury activities then the election has effect as described in new subsection(5).
6.New subsection (5) provides that the relevant amounts are not treated as financing expenses or financing income only to the extent that the amounts relate to treasury activities undertaken by the company. Consequently if a relevant amount does not relate to the company’s treasury activities then it cannot be included in the election.
7.New subsection (6) allows for the extent of the relevant amount included in the election under new subsection (5) to be determined on a just and reasonable basis. New subsection (7) continues the current provision that a group treasury company election must be made within three years of the end of the period of account of the worldwide group.
8.Subsection (2) provides that the amendments apply to periods of account of the worldwide group beginning on or after 11 December 2012.
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.
