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TIOPA10/S397

Of the two methods applied in computing the basic interest allowance of the worldwide group for a period of account, the simpler method used by default, is the fixed ratio method.

Applying this method, the basic interest allowance is the lower of:

• a fixed percentage (30%) of the worldwide group's aggregate tax‑EBITDA; and
• the fixed ratio debt cap for the period.

Aggregate tax-EBITDA

»Ê¹ÚÌåÓýapp tax-EBITDA of a company is a measure of its earnings before interest, tax, depreciation and amortisation, but computed according to corporation tax rules. »Ê¹ÚÌåÓýapp amounts for the UK group companies that were members of the worldwide group at any time in the period of account are aggregated to produce the aggregate tax-EBITDA of a worldwide group for a period of account. »Ê¹ÚÌåÓýapp tax-EBITDA of a company may be negative, but where the sum of these amounts is negative, the group is treated as having tax-EBITDA of zero. As with aggregate tax-interest, there are rules dealing with disregarded periods where company accounting periods do not coincide with the group's period of account, or a company joins or leaves a group part way through a period.

»Ê¹ÚÌåÓýapp fixed ratio debt cap

»Ê¹ÚÌåÓýapp debt cap taken into account under the fixed ratio method is a measure of the entire worldwide group's net external interest expense. It is an accounting-based measure.

»Ê¹ÚÌåÓýapp first stage in computing this limit is calculation of the worldwide group's net group-interest expense from accounting data. This comprises amounts of interest and similar financing expense or income that are included within the profit or loss in the group's financial statements. »Ê¹ÚÌåÓýapp specific categories of income and expense which fall within net group-interest expense are set out in the legislation.

»Ê¹ÚÌåÓýapp measure of external interest expense used to compute the fixed ratio debt cap is the adjusted net group-interest expense of the group (ANGIE). This is computed by making specific upwards and downwards adjustments to the net group-interest expense of the group for the period of account. »Ê¹ÚÌåÓýappse adjustments align the measure more closely with the type and timing of amounts included in net tax-interest.

»Ê¹ÚÌåÓýapp fixed ratio debt cap is the sum of the ANGIE and any excess debt cap brought forward from the previous period.

Simple examples

In a simple case where no amounts are brought forward and the de minimis amount is not relevant, the group's interest restriction if any, will be:

• »Ê¹ÚÌåÓýapp aggregate net tax-interest expense for the worldwide group

less the lower of:

• 30% of the worldwide group's aggregate tax-EBITDA; and
• the fixed ratio debt cap for the period of account.

Example A

• (A) - Aggregate net tax interest expense = 25
• (B) -ÌýAggregate tax-EBITDA = 100
• (C) -Ìý30% of aggregate tax-EBITDA - (B x 30%) = 30
• (D) - Fixed ratio debt cap (ANGIE) =150
• (E) - Basic interest allowance ( lower of C or D) = 30

Restriction = (A-E) = nil

Basic interest allowance not used = (E-A) = 5

»Ê¹ÚÌåÓýappre is unused allowance of 5 as the worldwide group's basic interest allowance exceeds its aggregate net tax-interest expense by that amount. This amount can be carried forward.

Example B

• (A) -ÌýAggregate net tax-interest expense = 50
• (B) -ÌýAggregate tax-EBITDA = 100
• (C) -Ìý30% of aggregate tax-EBITDA = (B x 30%) = 30
• (D) - Fixed ratio debt cap ( ANGIE) = 150
• (E) - Basic interest allowance ( lower of C or D) =30

Restriction = (A-E) =20

Basic interest allowance not used = (E-A) = nil

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