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The Worldwide Debt Cap legislation was introduced in 2009 and applies for large corporate groups with periods of accounting beginning on or after 1 January 2010.  In broad terms the legislation restricts the tax deductions for interest and other finance expenses of UK companies and companies with UK permanent establishments in a group to the external finance expense amounts of the worldwide group as a whole. 

These proposed changes will allow a wider range of financing expenses to be taken into account in the external debt amount by extending the definition of "available amount".  The proposal is to extend the definition to include arrangements which, although not strictly "loans", have the same economic effect provided that two conditions are met. 

The finance expenses that will be included within the definition of "available amount" are:

a)         debits under the relevant non-lending relationships rules;

b)         alternative finance arrangement returns (Islamic finance);

c)         manufactured interest payments;

d)         certain repo deductions; and

e)         certain structured finance arrangements deductions.

The first condition is that the expense is deductible for UK tax purposes ignoring the effect of the worldwide debt cap.

The second condition is that it is shown as a finance cost in the consolidated accounts of the worldwide group.

UK companies that are part of large groups within the worldwide debt cap regime and which have entered into these types of arrangements are currently disadvantaged because the deductions are included in the tested amount (i.e. the tax deductions that UK companies in the group are seeking to claim for their finance expenses) but not in the available amount.   Extending the definition of "available amount" will resolve this anomaly.  However, by including the condition that the expense must be deductible for UK tax purposes, this is yet another departure from the basic premise that the available amount should be readily ascertainable from the face of the consolidated accounts.

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