Revenue Note for Guidance

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Revenue Note for Guidance

Chapter 2

Interest Limitation

Summary

This Chapter provides the legislation for the operation of the interest limitation, including any additional definitions, the rules for carry forward of disallowable amounts and total spare capacity and the reporting requirements of relevant entities.

835AAB Interpretation (Chapter 2)

Summary

This section provides further definitions relevant to the calculation of the interest limitation and instructions on the calculation of EBITDA.

Details

(1) Introduces a definition of legacy debt for the purposes of this Part.

“legacy debt” means a debt the terms of which were agreed before 17 June 2016 together with any contract entered into for the sole purpose of reducing interest rate risk on that debt. However, where the terms of the debt include provision for an amount of principal not yet drawn down at 17 June 2016, such principal will only be considered an agreed term of the debt where there is a legal obligation on the lender to make the funds available upon the happening of milestones as set out in the terms agreed before 17 June 2016.

“milestone” means a pre-determined deliverable or project phase defined in the terms of a debt, which is connected with the drawdown of the principal on that debt, but does not include a call by the borrower for the drawdown of that principal.

(2) This subsection provides that the amount of deductible interest equivalent in respect of a legacy debt for accounting period is the lower of the deductible interest equivalent that arises on the legacy debt in that period or an amount of deductible interest equivalent that would have arisen in that period based on the terms of the legacy debt as at 17 June 2016.

(3) This subsection introduces the term ‘net interest equivalent’ which is calculated by subtracting the deductible interest equivalent related to legacy debt from the deductible interest equivalent, and then subtracting the taxable interest equivalent of the relevant entity for an accounting period.

(4) Where the result of the calculation in subsection (3) is greater than or equal to zero, it is referred to as ‘exceeding borrowing costs’, and if lower than zero, it is referred to as ‘interest spare capacity’.

(5) Provides that, for the purposes of this Part, the amount of EBITDA in respect of a relevant entity and an accounting period is the greater of nil or the result of the formula provided in this subsection. The amount calculated is the sum of:

  • the relevant profit or loss as defined above,
  • exceeding borrowing costs or interest spare capacity (being a negative amount) as defined above,
  • the deductible interest equivalent amount in respect of legacy debt (as defined above),
  • any capital allowances or charges (being a negative amount) made to or on the relevant entity but excluding any amount of such allowance or charge referrable to deductible interest equivalent, and the amount in respect of the non-finance element of finance lease payments, included in calculating the relevant entity’s relevant profit or loss for the accounting period, and
  • the amount of any foreign tax that has reduced the income of the relevant entity in arriving at the relevant profit or loss for the accounting period.

Relevant Date: Finance Act 2021