SolvedCFM96780 | Interest restriction: joint ventures: interest allowance (non-consolidated investment) election: example 1: opaque JV
From HM Revenue & Customs · Corporate Finance Manual
For visual illustration view diagram showing X plc’s 50% investment in a joint venture where X plc makes a non consolidated investment allowance election
The diagram shows X plc and other investors each owning 50% of a joint venture (JV).
X plc has operating profits of 100 and pays interest expense of 50 to a third party. X plc makes a non‑consolidated investment allowance election.
The JV has operating profits of 150 and pays interest expense of 60 to a third party.
The diagram is used to illustrate how X plc is considered separately from the JV when a non‑consolidated investment allowance election is made.
Here the same figures from the example at CFM96740 are used but consider that X plc has now made an investment allowance (non-consolidated investment) election. Note that qualifying net group-interest expense is referred to as QNGIE in the calculation.
| Accounts | X plc | JV | X plc Group |
|---|---|---|---|
| Operating profit | 100 | 150 | 100 |
| 3rd party interest expenses | - 50 | - 60 | - 50 |
| Share of profits of JV | - | - | 45 |
| Profict Before Tax | 50 | 90 | 95 |
X plc group share of profits from JV - 50%
| Calculation of QNGIE | X plc Group |
|---|---|
| QNGIE in X plc group ( pre-election) | 50 |
| Share of JV QNGIE | 30 |
| Total QNGIE - (A) | 80 |
| Calculation of group -EBITDA | X plc Group |
|---|---|
| Group - EBITDA of X plc group ( pre-election) | 145 |
| Reduction in group - EBITDA | - 45 |
| Increase in share of group - EBITDA from JV group -EBITDA | 75 |
| Group - EBITDA - (B) | 175 |
Group ratio with election - 46% - ( A/B)
| Interest allowances | X plc |
|---|---|
| Tax - EBITDA | 100 |
| X plc group ratio | 46% |
| Interest allowance | 46 |
| Net tax- interest expense for X plc group | 50 |
| Less interest allowance | - 46 |
| Restriction | 4 |
With the election X plc is now able to calculate a group ratio of 46%. If this is compared to the example in CFM96740 when the election has not been made, this is a significant increase and leads to a reduction in the interest restriction.