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This guidance applies for accounting periods beginning before 1 April 2023. For accounting periods beginning on or after 1 April 2023, TIOPA10/S382(1A) applies to exclude finance costs incurred by charities from the scope of tax-interest expense amounts.

This simple example illustrates the issues dealt with in CFM97610 to CFM96740 and CFM95695.

A group consists of a parent company and three subsidiaries.

The parent company (C) carries on charitable activities. It also provides debt finance to a subsidiary carrying on a trade (TT) which does not qualify for charitable exemption. A second subsidiary carries on a charitable trade (CT). A third company has property profits that qualify for a charitable exemption (CP). It is assumed that there are no differences between the measure of amounts computed for accounting and for corporation tax purposes.

The figures below, for the first period of account to which the CIR applies, the year to 31 March 2018, may not be realistic but illustrate the principles and potential effect of the CIR.

Parent Company Charity C:

• Accrues interest receivable £1m from TT: This is not tax-interest income as it is exempted from tax by CTA10/S486. This is an intra-group transaction and so eliminates on consolidation. As such, it is not included in the group-interest calculation.
• Third party interest income £0.5m: This is not tax-interest income as it is exempt from tax by CTA10/S486. This is included in the group-interest calculation.
• EBITDA is zero (charitable activities only).

Taxable trader TT

• EBITDA of trade £7m.
  Included in both tax-EBITDA and group-EBITDA.
• Interest accrued payable to Charity C £1m. This is not tax-interest expense by virtue of TIOPA10/S459 (CFM95695) on the assumption that the charitable donation conditions are satisfied. This is an intra-group transaction and so eliminate on consolidation. As such, it is not included in the group-interest calculation.
• Interest accrued payable to bank £3m. This is included in tax-interest expense, and it is also included in group-interest figures.

Note that in this example it does not matter whether TT has transferred profits to the charity by means of payments qualifying for charitable donations relief (CTM09000). Such payments are not taken into account in computing the company’s tax-EBITDA, because they are excluded payments falling within TIOPA10/S407(3)(k). Such payments may therefore reduce a non-charitable company’s taxable profits without increasing the interest restriction.

Charitable trading company CT

• EBITDA of trade £15m. This is not included in tax-EBITDA, but does contribute to group-EBITDA.
• Interest accrued payable to bank £2m. This is not included in tax-interest expense but does contribute to group-interest.

Charitable property company CP

• Property income EBITDA £4m. This is not included in tax-EBITDA, but does contribute to group-EBITDA.
• Interest accrued payable to bank £3m. This creates non-trading loan relationships deficit, and hence is included in tax-interest. It is also included in the group-interest calculation.

Overall figures

Tax-EBITDA

TT £7m
Total £7m

Aggregate tax-interest expense of group (ANTIE)

TT £3m to bank
CP £3m
Total £6m

Group-EBITDA

TT £7m
CT £15m
PC £4m
Total £26m

Group interest expense (ANGIE and QNGIE)

C £(0.5)m (third party interest income, so negative)
TT £3m
CT £2m
CP £3m
Total £7.5m

Interest restriction

Applying the fixed ratio method, the interest allowance is 30% of tax-EBITDA of £7m that is £2.1m. This is more than the de-minimis amount of £2m.

The group ratio will be QNGIE divided by group EBITDA, £7.5m/£26m = 28.85%. So a group ratio election is not beneficial. This is because of the high aggregate levels of exempted trade and property profits that are included in group-EBITDA but not tax-EBITDA.

The fixed ratio debt cap at £26m (ANGIE) is much higher than the fixed ratio percentage of tax-EBITDA and does not lead to any restriction of the interest allowance.

Accordingly the interest capacity is £2.1m. As the ANTIE is £6.0m, the interest restriction is £3.9m.

Where there is a reporting company in place, any disallowance can be allocated to one or more consenting companies in priority to other UK group companies.

So, in this example, the reporting company might decide to allocate £3m of the disallowance to CP, which has charitable property income, to reduce its NTLRD to zero. The residual restriction of £0.9m could then be allocated to the taxable trader, reducing its deduction for trading loan relationship debits (TLRD) from £3m to £2.1m.