The worldwide debt cap rules introduced in Finance Act 2009 were part of a package of measures brought in to reform the taxation of foreign profits.

In broad terms, the rules are designed to limit the deduction for financing costs of a UK company, such that they do not exceed a group’s external financing costs on a worldwide basis. They came into force for periods of account beginning on or after 1 January 2010. These rules only affect large groups of companies (defined as groups having more than 250 employees; or turnover over €50 million and gross assets of over €43 million).

HMRC introduced a ‘gateway test’ for groups to determine whether or not they are affected by these new rules. If a group passes the gateway test it is not obliged to monitor the position any further. The gateway test works as follows:

• if the net debt of all UK companies within a group exceeds 75 per cent of the worldwide gross debt of the group, then further consideration of the detailed rules is required
• if the UK debt is 75 per cent or less of the worldwide gross debt no further action is required.

The gateway test has to be applied each year and it is quite conceivable that a group could meet the test in one year but not in a subsequent year.

For groups affected by the worldwide debt cap rules, the basic rule is that if the ‘tested expense amount’ (broadly speaking, the net financing costs of the UK companies) exceeds the ‘available amount’ (the gross financing costs of the worldwide group) the excess net UK financing costs are disallowed.

It is not uncommon for a charity to have a subsidiary trading company funded by interest-bearing loans from the parent charity. Without the introduction of some special provisions, the interest costs borne by the trading company could potentially be disallowable because the interest income received by the parent charity is not regarded as financing income for the worldwide debt cap rules (because the income is not subject to taxation) and is disregarded for all purposes of the worldwide debt cap legislation.

However, there is a provision in s326 TIOPA 2010 which allows the interest costs of a trading subsidiary to be disregarded where the loan on which the interest is being charged was advanced by a charity. For these purposes, a charity is defined as ‘any body of persons or trust established for charitable purposes only’.