»Ê¹ÚÌåÓýapp

Outline of finance cost adjustment

ÌýTM07020Ìýexplains that a company's tonnage tax activities are treated as if they are a separate trade.

In the absence of a special rule to prevent it, a company could arrange for all of its debt to be carried in the non-tonnage tax trade, obtaining a tax deduction for all the costs of debt finance, with its tonnage tax trade funded by share capital.

Likewise, in a tonnage tax group, those companies within the ring fence could be funded very largely by share capital, whilst tax-deductible debt is used to fund those companies outside the ring fence.

Thick capitalisation rules

To prevent this type of manipulation of the different types of funding between a company's or group's tonnage tax and non-tonnage tax activities, there are special rules in FA00/SCH22/PARA61 onwards. »Ê¹ÚÌåÓýappse are sometimes referred to as the ‘thick capitalisationâ€� rules.

Adjustments on a just and reasonable basis

»Ê¹ÚÌåÓýapp underlying rule is that, if the finance costs charged outside the ring fence exceed a just and reasonable proportion of the total finance costs, the excess is brought into account outside the ring fence as additional non-trading loan relationship credits on the tonnage tax companies.

See TTM07420Ìýfor singleton companies and TTM07430Ìýfor groups.

Meaning of finance costs

»Ê¹ÚÌåÓýapp definition of finance costs is widely drawn, and will include all costs arising from what would be considered on normal accounting principles to be a financing transaction, see TTM07410.

References

FA00/SCH22/PARA61 (treatment of finance costs; single company)	TTM17346
FA00/SCH22/PARA62 (treatment of finance costs; group company)	TTM17351
FA00/SCH22/PARA63 (meaning of finance costs)	TTM17356