The new Worldwide debt cap rules apply for accounting periods that began on or after 1 January 2010. The purpose is to limit the tax deduction for interest and other finance expense of UK companies in large groups to the external interest and other finance expense of the overall group. Despite its name the debt cap rules can apply to wholly UK groups.

As with any set of new, complex and potentially onerous rules, the first question is “does it affect me”?

It potentially applies to large groups if any of the UK members have a net finance expense of £500,000 or more and a net UK debt of £3 million or more. For this purpose, a group is large if it has more than 250 employees or has turnover in excess of €50 million and gross assets in excess of €43 million.

If you are still ‘in’ the rules then its impact may yet be avoided if the group passes a ‘gateway test’ where the aggregate net debt of the UK companies in the group is less than 75% of the worldwide gross debt. For some companies, the gateway test may prove onerous particularly if no consolidated accounts are prepared for the group or are prepared under International GAAP. The fact of the matter is, that as a result of the mechanics of the test, a surprisingly large number of companies will fail.  This will include, for instance, almost all large UK groups with at least one company with net debt of over £3m. As a result, the group will incur the additional compliance burden of going through the detailed debt cap calculations.

Of most concern, however, is whether the detailed calculation will give rise to an overall disallowance. Although each group will be different, it does appear that;

• If there is no external funding at all, the debt cap may in some cases eliminate any tax deduction for intra-group financing.
• The key determining factor will be the extent and nature of funding for the non-UK members of the group.
• Groups with high external debt levels will generally be less affected by these rules than those that are ultimately equity financed.
• Just because a group is wholly in the UK (no overseas member), this does not mean it is not impacted, although an overall disallowance is only likely to arise in limited circumstances.