CFM92040 | Debt cap: intra-group short-term debt: example of the effects of sections 319 and 320

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

Example of short-term debt election

A worldwide group has three subsidiaries in the UK, companies A, B and C.

Company A is a 100% subsidiary. During the year ended 31 December 2014 it reports the following amounts in its financial statements

• £20 million interest payable in respect of a 10 year bond

• £1 million interest payable in respect of a bank overdraft

• £3 million interest payable to company B in respect of a short-term finance arrangement

• £1 million interest payable to an overseas group company in respect of a short-term finance arrangement

Company B is a 60% joint venture company. During the year ended 31 December 2014 it reports the following amounts in its financial statements

• £1 million interest payable in respect of a bank overdraft

• £1 million interest payable to an overseas group company in respect of a short-term finance arrangement

• £3 million interest receivable from company A

Company C is a 100% subsidiary. During the year ended 31 December 2014 it reports the following amounts in its financial statements

• £3 million interest payable to an overseas group company in respect of a short-term finance arrangement

• £2 million interest receivable from a bank deposit

The calculations of the companies’ net financing deduction and net financing income, with and without the effect of an election under TIOPA10/S319 and the corresponding effect of TIOPA10/S320 are shown below.

Company B is not a relevant group company, since it is not a 75% subsidiary of the ultimate parent company, but it is a UK group company and a member of the worldwide group. It must elect jointly with company A if the £3 million interest payable on the short-term finance arrangement is not to be treated as a financing expense amount of company A, or a financing income amount of company B. And it is entitled to elect, jointly with the overseas company concerned, that the £1 million interest on the relevant short-term finance arrangement is disregarded.

Without the exclusion for short-term finance arrangements

Companies A, B and C all elect to exclude from their financing expense (and as a consequence also from financing income) the intra-group short term finance from B to A and from the overseas group company to A, B and C.

With the exclusion for short-term finance arrangements