CFM95730 – Corporate Finance Manual – HMRC Internal Manual

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TIOPA/S406(5)-(7)

The purpose of the calculations is to arrive at an overall tax-EBITDA figure for a given accounting period for a global group. Therefore, only amounts from a relevant accounting period that are attributable to the accounting period of the group are included in the company’s adjusted income tax result for the accounting period.

It is therefore necessary to adapt to any “periods not taken into account”. These are periods that:

  • Fall outside the group’s accounting period.
  • Relate to a period during which the company was not a member of the group.

When either of these circumstances apply, the amounts to be included in adjusted corporate tax revenue are reduced on a fair and reasonable basis to exclude such periods. This can result in zeroing.

This corresponds to the same issue of skipped periods discussed in connection with the calculation of tax interest.

Example 1

A company has a fiscal year for the fiscal year ending on December 31, 2017. It is part of a group that has a fiscal year for the fiscal year ending on March 31, 2018. Only amounts attributable to the last nine months of the fiscal year accounting period for the company will be included in the calculation of the adjusted corporation tax result for the accounting period of the group.

Example 2

A company has an accounting year for the year ending March 31, 2018. It is a member of a group that has an accounting year for the year ending March 31, 2018. However, the company leaves the group on March 1, 2018. Therefore, only amounts attributable to the first 11 months of the company’s accounting year will be included in the calculation of the adjusted corporation tax result for the group’s accounting year.

Fair and reasonable basic meaning

What “fair and reasonable basis” means in practice will depend on the particular facts and circumstances.

It should be noted that the notion of adjusted corporate tax result is based on the amounts that are taken into account for tax. Therefore, one would expect careful consideration to be given to when an item would generally be taken into account for tax purposes.

Accordingly, the case HMRC v Total E&P North Sea Ltd (UT/2018/0039) does not create an applicable precedent. Thus, while a time allocation approach would be acceptable as long as it does not lead to a distorted result, the calculation of the actual tax EBITDA figure for each period would not be rejected on the grounds that it goes more far than necessary. Likewise, a reasonable approximation should be acceptable.

Particular attention should therefore be paid to:

  • The period over which the amounts would be recognized in the company’s financial statements if they were established for particular periods.
  • The period in which the amounts would be taken into account by the company if it had a different accounting period.
  • Ensure amounts are in total fully allocated. In other words, if the accounting period is divided into a number of non-overlapping periods which, taken together, correspond exactly to the accounting period in question, the total of the amounts allocated to these periods must be equal to the amount awarded.

Example 3

A trading company or real estate business makes profits evenly throughout the year. Therefore, a simple time allocation is likely to be appropriate for allocating the company’s taxable profits to part of an accounting period.

Example 4

A business realizes a net taxable gain on the disposal of an asset during an accounting period. This net taxable gain would be attributable to the part of the period during which the disposal took place. Since the concept of adjusted corporation tax income is based on the inclusion of taxable gains after deduction of deductible losses, no attempt should be made to divide a net taxable gain into gross gain and deductible loss.

Example 5

A company pays a pension contribution in a period in line with previous periods. The deduction would be attributable to the part of the period during which the pension contribution was paid.

Example 6

A company pays an abnormally high pension contribution, so that an excess amount is spread over four years. This averaging would be applied to allocate the amount of the deduction for the excess amount to part of an accounting period.

Administration

Where there is an inquiry into the Restriction of Business Interests figures which involves a dispute on the fair and reasonable basis, HMRC may determine the fair and reasonable basis to be used as part of the process of closing the investigation. The reporting company may appeal the decision on the grounds that the award is not fair and reasonable.

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