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Corporate interest restriction ‘devil is in the detail’ – elections to amend the group ratio method

Corporate interest restriction: Group ratio method

This week’s article looks at two elections which adjust the group ratio method calculation.


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The corporate interest restriction rules have been removed from Finance Bill 2017 following the announcement of the general election. Until an announcement is made by Ministers (presumably following the election) we would recommend that groups assume that the rules will apply from 1 April 2017. This is the third of a series of articles looking at some of the detail of the new corporate interest regime and is based on the legislation originally included in Finance Bill 2017.

This week, we look at two elections which adjust the group ratio method calculation, the purpose of which is to achieve a more consistent treatment between the figures taken from the corporation tax computations and those used in the group ratio method calculation which are taken from the group accounts. The elections could provide significant benefits but, inevitably, there will be an additional compliance burden.


Interest is disallowed to the extent the net tax interest expense for UK companies exceeds the interest capacity.

The interest capacity is based on a percentage of tax-EBITDA or, if lower, a modified debt cap limit, but is always at least £2 million.

For each period, a group can elect to calculate the interest capacity based on the group ratio method rather than the fixed ratio method.

Under the group ratio method:

  • The percentage to be applied to tax-EBITDA is calculated by dividing a measure of group interest (known as qualifying net group-interest expense) by group EBITDA, both amounts being based on the group accounts; and
  • The group ratio modified debt cap limit is also based on the qualifying net group-interest expense.

Two elections can be made which can amend group-EBITDA and qualifying net group-interest in respect of the matters shown below.

Group–EBITDA (chargeable gains) election (this adjusts group-EBITDA)

When calculating group-EBITDA, an election can be made in respect of the treatment of capital disposals (the ‘chargeable gains election’).

Absent the chargeable gains election, group-EBITDA includes the capital profit on the disposal of relevant assets (e.g. shares, plant, property and intangibles). The amount included is the sum of the capital profits on individual assets, for UK and non-UK group entities, where, broadly, proceeds exceed original cost. Capital losses are excluded.

The effect of the chargeable gains election is that group-EBITDA instead includes the net taxable gain for the period, for UK and non-UK group entities, that would arise assuming that all group members are within the charge to UK corporation tax (ignoring certain reliefs). Capital losses are included. Where shares in a group member are sold, the disposal of the shares is ignored and, instead, the capital gain or loss on each asset owned by the group member must be calculated.

Interest allowance (alternative calculation) election

A single election can be made in respect of four matters.

Employer pension scheme contributions (election adjusts group-EBITDA)

When calculating group-EBITDA, for registered UK pension schemes, the figures in the group accounts for employer pension contributions are replaced with the amount of the UK corporation tax deduction, i.e. amounts will be deducted on a paid basis, taking account of the spreading treatment if applicable.

This would be beneficial where significant contributions are made to a final salary scheme which reduce tax-EBITDA but there is a much lower finance charge in the group accounts which simply reflects the movement on the balance sheet liability.

Employee share acquisitions/schemes (election adjusts group-EBITDA)

When calculating group-EBITDA, amounts in the group accounts relating to employee share acquisition arrangements are replaced with the UK corporation tax deduction/receipt (or what would be the UK corporation tax deduction/receipt if overseas companies were resident in the UK).

Capitalised interest (election adjusts qualifying net group-interest)

Net finance amounts derived from the group accounts may take account of interest which is capitalised or included in the balance sheet. When calculating qualifying net group-interest expense, for assets and liabilities where the profit or loss falls to be calculated in accordance with GAAP, capitalised interest is included when recognised in profit and loss and not when capitalised. The adjustment must be made for all group members, including non-resident companies.

Changes in accounting policy in the group accounts (election adjusts group-EBITDA and qualifying net group-interest expense)

When calculating group-EBITDA and net group-interest expense, adjustments are made to the finance charge in the group accounts for amounts that would be recognised for tax purposes in respect of changes in accounting policy. The adjustments must be made by assuming that the group is a company within the charge to corporation tax.

Form and time limit for the elections

Each election is made as part of the interest restriction return which will normally be filed within 12 months from the end of the period.

Accordingly, it will be possible to use some hindsight in determining whether an election is expected to be beneficial. Each election does not need to be made for the first period under the new rules but, once made, is irrevocable, and applies to the period for which it is made and all future periods.

This is the third in our series of articles on the detail of the new corporate interest restriction regime. Our previous articles covered draft guidance and regulations on the regime, and the debt cap when applying the fixed ratio method.

For further information please contact:

Rob Norris

Mark Eaton 

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