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Examples

»Ê¹ÚÌåÓýapp examples below are designed to demonstrate how a just and reasonable result might be reached.  »Ê¹ÚÌåÓýappy are not intended to be exhaustive and have been kept simple.

Example 1

Scenario

A tonnage tax (TT) group consists of a parent and a wholly owned subsidiary.  Both companies carry out qualifying shipping operations and all activities are within TT.  External finance costs of £1m were incurred by the parent company.

Tax consequences

No adjustment will be required under FA00/SCH22/PARA62 as all finance costs are within the TT ring fence.

Example 2

Scenario

A TT group comprises a UK parent (non TT) and a wholly owned UK subsidiary which is within TT.   »Ê¹ÚÌåÓýapp TT company is wholly funded by equity and the parent has incurred finance costs of £1m.  Both companies have similar funding requirements, so the just and reasonable apportionment is 50%.

Tax consequences

»Ê¹ÚÌåÓýapp finance costs outside the TT ring fence exceed a reasonable proportion of the total costs, so an adjustment is required under FA00/SCH22/PARA62.

Using the suggested formula at TTM07450, the finance cost adjustment (FCA) will be:

Amount	Description
A = £1,000,000	(group finance costs outside the ring fence)
B = £1,000,000Â	(total group finance costs assuming no TT election)
F = 50%            Â	(just and reasonable fraction)

FCA = £1,000,000 � (50% x 1,000,000 = £500,000)

FCA = £500,000

»Ê¹ÚÌåÓýapp FCA of £500,000 is assessable on the TT company as a non-trading loan relationship credit.  »Ê¹ÚÌåÓýapp net effect for the group is:

Description	Amount
Deduction re finance costs (non TT company)	-£1,000,000
FCA assessable on TT company	£500,000
Net effect on the group	-£500,000

Example 3

Scenario

A TT group comprises a UK parent (non TT) and a wholly owned UK subsidiary which is within TT.   »Ê¹ÚÌåÓýapp non TT company has finance costs of £750,000 and the TT company has incurred finance costs of £1m.  Both companies have similar funding requirements, so the just and reasonable apportionment is 50%.

Tax consequences

Using the suggested formula at , the FCA will be:

Amount	Description
A = £750,000	(group finance costs outside the ring fence)
B = £1,750,000	(total group finance costs assuming no TT election)
F = 50%	(just and reasonable fraction)

FCA = £750,000 � (50% x 1,750,000 = £875,000)

FCA = Nil

In this example the finance costs outside the ring fence are less than the just and reasonable apportionment, so no FCA is required.  »Ê¹ÚÌåÓýapp legislation only permits an adjustment where the finance costs outside the ring fence exceed a just and reasonable amount, so a negative adjustment is not due.

Example 4

Scenario

A TT group consists of a UK TT company, a UK non TT company and an overseas company which qualifies to pay dividends under the provisions of FA00/SCH22/PARA49.  Finance costs of £1.2m have been paid by the UK non TT company.  All three companies have the same funding requirements.

Tax consequences

»Ê¹ÚÌåÓýapp finance costs outside the TT ring fence exceed a reasonable proportion of the total costs, so an adjustment is required under FA00/SCH22/PARA62.  »Ê¹ÚÌåÓýapp overseas company counts as TT for FCA purposes as it is within FA00/SCH22/PARA49, so the just and reasonable apportionment is 33.33%.

Using the suggested formula at TTM07450, the finance cost adjustment (FCA) will be:

Amount	Description
A = £1,200,000	(group finance costs outside the ring fence)
B = £1,200,000	(total group finance costs assuming no TT election)
F = 33.33 per cent	(just and reasonable fraction)

FCA = £1,200,000 � (33.33% x 1,200,000 = £400,000)

FCA = £800,000

»Ê¹ÚÌåÓýapp FCA of £800,000 is assessable on the TT company as a non-trading loan relationship credit.  »Ê¹ÚÌåÓýapp net effect for the group is:

Description	Amount
Deduction re finance costs (non TT company)	-£1,200,000
FCA assessable on TT company	£800,000
Net effect on the group	-£400,000

References

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Finance costs of group companies	TTM07430