CFM91835 | Debt cap: failure to make statements of allocation: default allocation of disallowance of financing expense amounts: DRICs: example

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Example - default allocation where a group includes DRICs

A group has 7 relevant group companies which, in a particular period of account of the worldwide group, have net financing deductions. Two of these companies are dual resident investing companies (DRICs). The net financing deductions are as follows:

The tested expense amount (TEA), which is the aggregate of the net financing deductions across all relevant group companies, is therefore £272 million. The amount referred to as X in S284A, the aggregate net financing deduction for the DRICs, is £112 million.

The group does not submit a statement of allocated disallowances, and a “default allocation” is made.

The following table shows how a disallowance would be allocated under S284 and S284A in two scenarios:

• if the total disallowed amount (TDA) is £60 million, and

• if the total disallowed amount is £180 million.

For a company that is not a DRIC, S284A (2) provides that the disallowance is calculated by applying the formula NFD/(TEA - X) x TDA.

Thus in the first scenario, the disallowance for each non-DRIC company will be:

NFD x 60/ (272 - 112), or NFD x 60/160

For a DRIC, S284A (3) provides the disallowance is NFD/X x (TDA - (TEA - X))

Inserting the figures for the first scenario (where the total disallowed amount is £60m) into this formula gives:

NFD/112 x (60 - (272 - 112))

Since this will always be negative, however, the disallowance for each DRIC is taken as nil.

In the second scenario, the disallowance for each non-DRIC would, under the S284A (2) formula, be:

NFD x 180/ (272 - 112)

This amount would, however, always be more than the company’s net financing deduction, so S284A (2) provides that the disallowance is limited to the company’s NFD.

The amount to be allocated to each DRIC under S284A (3) will be:

NFD x (180 - (272 - 112)/112, or NFD x 20/112

The overall result, in each scenario, will therefore be allocation of the full amount of the disallowance: