Worldwide Debt Cap Section 35 & Schedule 15 Finance Act 2009

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1 Worldwide Debt Cap Section 35 & Schedule 15 Finance Act 2009 Olswang LLP

2 Worldwide Debt Cap Mark Joscelyne and Hugo Webb of Olswang LLP discuss the worldwide debt cap in Schedule 15 Finance Act 2009 INTRODUCTION For some years the UK Government has been concerned that international groups have burdened their UK companies with excessive amounts of debt so as to take advantage of the UK s relatively generous interest deduction rules. In order to combat this perceived abuse, and as a 'quid pro quo' for the foreign dividend exemption rules introduced in FA 2009, the 'worldwide debt cap' ('WDC') rules were (after a lengthy consultation process and several iterations) introduced, by FA 2009, s 35 and Schedule 15 (references to Parts and paragraphs below are (unless stated otherwise) to Schedule 15). In essence, the purpose of the WDC is to limit the tax deduction for interest and other finance expenses of UK companies in large groups to the external interest and other finance expense of the overall group as reflected in the consolidated accounts of the worldwide group. The effect is that intra-group finance expense from overseas group companies will be allowed in the UK to the extent that it is matched by the group's external overseas finance expense. The WDC is therefore a further set of restrictions on UK tax relief for corporate debt, in addition to (amongst others) the existing transfer pricing, thin capitalisation, distribution, anti-arbitrage and late paid interest rules. The approach of the WDC is to apply these other rules before applying the WDC rules. Certain proposed changes to the WDC rules have already (since FA 2009) been announced ((in a ministerial statement on 9 November (followed by an HMRC Technical Note)), correcting and removing various anomalies and ambiguities. Draft legislation is to be released with the Pre-Budget Report (on 9 December 2009) for inclusion in Finance Bill Some of these proposed changes are referred to below. Targeted scenarios Intra-group loans fall naturally to be divided into upstream loans to UK group companies from their overseas subsidiaries and downstream or sideways loans from parent or sister companies. The new dividend exemption regime (effective since 1 July 2009) should reduce the previous need or inclination to repatriate surplus cash from overseas subsidiaries by means of upstream loans rather than dividends (particularly from subsidiaries with low headline or effective rates of tax). So the impact of the WDC in this context should be mainly in circumstances where the subsidiary is constrained from paying dividends due to lack of distributable profits (or overseas equivalent) and interest free loans would be problematic due to local transfer pricing rules. It is in the context of downstream and sideways loans from foreign parent and sister companies where the WDC is likely to be more troublesome. Considerable concern has been expressed (during and since the consultation process) as to the arbitrary and potentially Olswang LLP

3 economically distorting effect of the new rules. The point has been made, for example, that two UK companies which are in all material respects identical may be taxed very differently according to the levels of debt in their respective foreign parents and elsewhere across the rest of the overseas group. Commencement Schedule 15 has effect in relation to periods of account of a worldwide group that begin on or after 1 January 2010 (paragraph 97). There is an anti-avoidance provision (paragraph 98) to prevent manipulation of periods of account by the ultimate parent of the group to forestall the application of the WDC rules. SCOPE Worldwide groups The legislation applies to 'worldwide groups' (paragraphs 2(1) and 15(1)), that is groups of entities that are 'large' and contain one or more 'relevant group companies' (paragraph 78). A 'relevant group company' is any UK company within the group that is either the parent company of the group or a 75% subsidiary (paragraph 86(3)). Schedule 15 applies by reference to periods of account of the worldwide group. In respect of a period of account of a worldwide group, Schedule 15 only applies if a 'Gateway Test' (not a statutory term) is breached. The Gateway Test is discussed more fully below. 'Large' is based on the definitions of micro, small, and medium-sized enterprises (with similar modifications to those that apply in relation to the definition of 'large' in the transfer pricing legislation (ICTA 1988, Schedule 28AA paragraph 5D)) (paragraph 85). It should be noted that the definition of 'worldwide group' is such that it does not require there to be any non-uk companies within the group and indeed any such purely UK large group will fail the Gateway Test if it has any companies with 'net debt' (see below) in excess of the 3 million 'de minimis' threshold. Relevant group companies (see above) should be distinguished from 'UK group companies'. A UK group company is any UK company that is a member of the group for IAS purposes (the test for which is based on control, meaning the power to govern financial and operating policies); typically a 51% company. The key operative provisions are those in Part 3, which disallow interest and other finance expense and apply to relevant group companies, and those in Part 4, which exempt certain financing income (so as to prevent the WDC giving rise to double taxation) and apply to UK group companies. GATEWAY TEST (PART 2) The Gateway Test is designed to be an approximation to the main rules and to filter out "innocent" groups, i.e. those with relatively low levels of UK debt as compared to the group's external debt. The Gateway Test looks at financial liabilities and assets whereas the main rules, which provide for the disallowances and exemptions, look at financial expenses and income. The Gateway Test is breached, and therefore Schedule 15 applies, in respect of a period of account of the worldwide group if, for that period of account, the UK net debt ('UND') of the group exceeds 75% of the worldwide gross debt of the group ('WGD') (paragraph 2(1)). See Boxes 1 and 2. Olswang LLP

4 UK net debt To arrive at the 'UK net debt' ('UND') of a group you aggregate the 'net debt amounts' of each relevant group company (paragraph 3(1)). The 'net debt amount' ('NDA') of a company is the average of its 'net debt' ('relevant liabilities' less 'relevant assets') for the period, based on the amount of the liabilities and assets on the first and the last day of the worldwide group's period of account (paragraph 3(2)). No distinction is drawn between intra-group and external debt for UND purposes. The definitions of 'relevant liabilities' and 'relevant assets' of a company for the purposes of calculating net debt are in paragraphs 4(3) and (4) respectively. 'Relevant liabilities' are amounts borrowed by the relevant company and liabilities of the relevant company in respect of finance leases (in each case, based on GAAP (paragraph 4(5)) and other amounts which may be specified by regulations (paragraph 4(3))). 'Relevant assets' includes amounts loaned by the relevant company, investments by the relevant company in finance leases and (notably) cash and cash equivalents (in each case, again based on GAAP (paragraph 4(5)) and such other amounts as are specified by regulation. If the NDA of a company is less than 3 million 1 then it is treated as nil (paragraph 3(3)). This includes where the NDA is negative, i.e. where the company has net relevant assets (paragraph 4(2)). See Box 2. This means that companies within the group with net finance assets are excluded from UND (making the label 'UK net debt' somewhat misleading). The explanation would appear to be that the inclusion of net finance asset companies within UND would have made it advantageous in certain circumstances for the parent company of a group which is financing a UK subsidiary to be UK resident, rather than resident elsewhere in the EC, thereby constituting a restriction on the freedom of establishment. The result is that some innocent groups will fail the Gateway Test and be brought within the scope of the WDC regime - and have to comply with its not inconsiderable compliance requirements - only to have relatively little or no net amount disallowed under the operative provisions. Worldwide gross debt The WGD of a worldwide group for a period of account is the average of the relevant liabilities of the group for the period on the day before the first day and on the last day of the relevant period 2. One is here looking at the consolidated liabilities of the group, as opposed to liabilities of any particular company within the group, and therefore (in contrast to the position for UND) at external debt only. 'Relevant liabilities' has the same meaning as it has in relation to 'net debt' for UND purposes, save that, here, amounts borrowed and finance lease liabilities have the same meaning as the accounting standards in accordance with which the financial statements of the group are drawn up, typically International Financial Reporting Standards ('IFRS') as opposed to GAAP. This gives rise to one of the anomalies to be corrected by Finance Bill Where a UK company in the group has external debt the same liability 1 This figure can be amended by regulation (see paragraphs 3(5) (7)). The net debt amount of a dormant company (CA 2006 s 1169) is also deemed to be nil (paragraph 3(4)). 2 Note that, for WGD, you must look at the day before the first day of the period of account whereas, for UND, you look at the first day. The explanation for this is that the WGD is measured by the actual consolidated accounts for the group. Those accounts will show the relevant liabilities as at the last day of the relevant period of account (and not as at the first day). Therefore, for convenience, the group can use the last day of the previous period of account rather than the first day of the relevant period of account. When it comes to UND, because the relevant group company may well draw up its accounts by reference to different periods from the consolidated accounts, the assumption is that it will be necessary to use notional figures (not actual accounts figures) anyway as at the relevant dates, i.e. the first and last day of the relevant period of account. Olswang LLP

5 will be included in both the UK accounts and the consolidated accounts. The differing accounting treatment could result in a liability being ascribed different values in the accounts (e.g. if borrowings are measured at amortised cost in individual company accounts but fair value in consolidated accounts), causing a distortion in the application of the Gateway Test. It is therefore proposed to amend the Gateway Test in Finance Bill 2010 so that, in such circumstances, the standard of measurement used in the consolidated accounts will be used. This means that the value used for the relevant liability when calculating WGD will therefore be used for the calculation of the NDA of the relevant UK company. A further proposed change to the Gateway Test relates to amounts subscribed for preference shares. The concern here is that such amounts could, for the relevant accounting purposes, be 'amounts borrowed' and therefore 'relevant liabilities' for the purposes of calculating NDA and WGD and 'amounts loaned' and therefore 'relevant assets' for the purposes of NDA. It is proposed that Finance Bill 2010 will put the position beyond doubt and specifically exclude preference share issues and subscriptions from the relevant definitions. Qualifying financial service group The Gateway Test will not be breached if, during the period of account, the group is a 'qualifying financial services group' (paragraphs 7 to 13). In essence, a group will be a qualifying financial services group if, in relation to the period of account, all or substantially all of the group's trading income is derived from 'qualifying activities'. This, broadly, means lending activities, insurance activities and 'relevant dealing' in financial instruments (the 'trading income condition'). These terms are defined respectively in paragraphs 9, 10 and 11. It is proposed that the definition of 'financial instruments', which is based on the FSA Handbook definition, will be expanded by Finance Bill 2010 to include certain derivatives not currently falling within the term 'financial instrument' in the FSA Handbook. THE DISALLOWANCE RULE: THE 'MAIN COMPARISON TEST' (PART 3) Part 3 applies where, for a period of account of the worldwide group to which Schedule 15 applies (i.e. where the Gateway Test has been breached), the 'tested expense amount' ('TEA') exceeds the 'available amount' ('AA'). The amount by which TEA exceeds AA is the 'total disallowed amount' ('TDA'). If AA exceeds (or is equal to) TEA then no disallowance arises. TEA and AA are defined in Parts 8 and 9 respectively and are explained below. Disallowance mechanics Paragraphs 17 to 26 comprise the mechanics dealing with the disallowance (although, buried within these, at paragraph 22 is the provision which actually provides for the disallowance for corporation tax purposes). The relevant group companies (to which Part 3 applies) may appoint one of their number (as authorised company) to act as the reporting body for a relevant period of account. Such an appointment must be signed on behalf of each relevant group company. If no such appointment is made then the reporting body will be the relevant group companies acting jointly. The reporting body must submit a statement of allocation of disallowances within 12 months of the end of the relevant period of account. A revised statement may be issued within 36 months of the end of the period of account. The group generally has autonomy in allocating the disallowances between the relevant group companies. However, if no allocation is made there is a default allocation based on proportionality. Proposed changes to be included in Finance Bill 2010 will enable companies to elect to be an 'excluded company' (provided the authorised company, if one has been appointed, consents) such that no disallowances can be allocated to it (either through the statement of allocations or the default position), unless the UK group contains no non-excluded Olswang LLP

6 companies. Excluded company treatment will apply mandatorily to dual resident investment companies to prevent groups with such companies absorbing Part 3 disallowances with non-trading deficits that are anyway disallowed by ICTA 1988, s 404. Calculating the tested expense amount (Part 8) TEA for a period of account is the total of each relevant group company's 'net financing deductions' ('NFDs'). To calculate the NFD of a relevant group company you add up its total (intra-group and external) financing expense amounts ('FEAs') and deduct its total financing income amounts ('FIAs'). You then aggregate the NFDs of each relevant group company to calculate TEA. See Box 3. If the NFD of a company is less than 500,000 then it is treated as nil. If a company's total FIA exceeds its total FEA then its NFD is zero (and not a minus figure) (paragraph 70(4)). So, in the same way as for the Gateway Test (under which, as seen, when calculating UND, finance assets of a company can reduce or eliminate its finance liabilities but companies with net finance assets are disregarded), the financing income of a company can reduce or eliminate its FEAs but cannot reduce NFDs beyond this. Without more, this would have a double taxation effect because the same financing amount would be disallowed as an expense for the group but taxed as income. This is cured by provisions in Part 4 which provide for exemption of corresponding financing income from corporation tax. Finance expense amounts and finance income amounts (Part 7) FEAs (paragraph 54) are loan relationship debits (excluding impairment losses, exchange losses and related transaction losses), financing costs implicit in finance lease payments and financing costs payable on debt factoring. FIAs (paragraph 55) are loan relationship credits (excluding impairment loss reversals, exchange gains, and related transaction profits), finance lease income and financing income receivable on debt factoring. It is proposed that the definition of FIAs will be extended in Finance Bill 2010 to include guarantee fees. Without the proposed amendment, there would be a mismatch between group companies in the operation of the WDC rules where guarantee payments are made (or imputed under transfer pricing rules) between group companies, as a payment of a guarantee fee will normally give rise to a loan relationship debit (as an expense of bringing a loan relationship into existence) whereas the receipt of a guarantee fee is not a loan relationship credit (as it does not bring a loan relationship into existence for the guarantor). Paragraphs 57 to 69 exclude certain financing expense and income amounts ('relevant amount's) from the definitions of FEA and FIA of group treasury companies (if an election is made) (paragraph 57) 3, REITs (paragraph 58) and companies engaged in oil extraction (paragraph 59). It is also possible for companies to elect that intra-group short term finance expense and income amounts are treated as relevant amounts (paragraphs 60 to 62). Furthermore, stranded deficits in non-trading loan relationships and management expenses can be elected to be relevant amounts. Finally, paragraphs 67 and 68 exclude relevant amounts paid to charitable, educational and public bodies so as to prevent a disallowance being made where a corresponding disregard of the amounts receivable is not available due to the tax status of the receiving body. The definition of public bodies is to be expanded in Finance Bill 2010 to include non-departmental public bodies that are not within the charge to corporation tax. 3 Finance Bill 2010 will refine the definition of a group treasury company to exclude trading companies performing peripheral group treasury company functions. Olswang LLP

7 Calculating the available amount (Part 9) AA for a period of account is the sum of the amounts disclosed in the financial statements of the group (i.e. the group's gross consolidated expense (both UK and non-uk)) in respect of interest payable on amounts borrowed, amortisation of discounts, premiums and ancillary costs 4, financing costs implicit in finance lease payments, financing costs relating to debt factoring, and other amounts specified by regulations, but disregarding preference share dividends where the shares are recognised as a liability in the group's financial statements for the period. It can be seen that there is potential for mismatch between TEA, which follows the corporation tax loan relationship outcome, and AA, which follows the consolidated accounts outcome. Take, for example, a parent company with external borrowings the finance expense on which will be reflected in the consolidated accounts on an accruals basis which has lent money to its UK subsidiary. If the intra-group interest is rolled up and the circumstances are such that the late payments rules (in Chapter 8 Part 5 CTA 2009) apply, TEA will be less than AA and there will be no disallowance. However, AA will effectively have been wasted. If and when the interest is paid, TEA will increase and (assuming that the current interest is also paid) exceed AA resulting in a disallowance. Representations have been made that, to avoid this anomaly, TEA should be calculated as if the late interest rules did not apply but the Government had rejected this suggestion because of the principle adopted that the existing (pre-wdc) interest restrictions should apply before the WDC is applied. Following changes in FA 2009, there is at least a consolation that the late interest rules now have a significantly narrower application than previously. Proposed changes in Finance Bill 2010 will eliminate accounting and tax mismatches in relation to borrowing by partnerships. In such cases, the loan relationship credits and debits required to be brought into account by CTA 2009, Chapter 9 Part 5 will be used for calculating AA, rather than the financing costs included in the consolidated accounts. The Government is also proposing to introduce a new regulation making power into Schedule 15 to introduce detailed rules to deal with accounting mismatches that arise due to the definition of financing costs used to calculate FEA being wider than that used to calculate AA. It is proposed that the regulations made under this new power will have retrospective effect so as to apply from 1 January CORPORATION TAX EXEMPTION FOR CERTAIN FINANCING INCOME (PARTS 4 AND 5) Exemption of financing income (Part 4) Part 4 provides for the exemption of certain financing income of UK group companies for a period of account of the worldwide group in which TEA exceeds AA, i.e. where there has been a disallowance under Part 3. The effect of these provisions and paragraph 34 in particular is to provide for exemption from corporation tax of FIAs (the paragraph 55 definition) for the relevant period. The total amount of FIAs that can be exempted must not exceed the lower of TDA and the tested income amount ('TIA'). As noted above, these provisions effectively prevent double taxation for the group which would otherwise arise as a result of group companies with net FIAs being treated as having a NFD of zero and therefore not reducing TEA. A statement must be provided to HMRC within 12 months of the end of the relevant period by the UK group companies (or the reporting company appointed by them) listing one or more UK group companies, and in respect of each company, one or more FIAs for the relevant periods that are to be exempted. 4 It is proposed that Finance Bill 2010 will replace the definition of ancillary costs so as to make it clear that items such as losses on derivatives used to hedge borrowings are not included. Olswang LLP

8 Intra-group financing income where payer denied deductions (Part 5) Part 5 allows certain intra-group financing income received from a company resident in an EEA country (other than the UK) to be exempt from corporation tax. For the exemption to apply, the payer of the income must be liable to tax in that EEA territory (by reference to profits, income or gains arising to the payer) and must also not be entitled to tax relief in respect of the payment, either for the current period, a previous period or a subsequent period (paragraph 40). The payer and the payee must also be 'relevant associates', i.e. 75% sister subsidiaries, or one must be a 75% subsidiary of the other (paragraph 41). 'Financing income amount' for the purposes of Part 5 is defined in paragraph 46 (broadly the same as the paragraph 55 meaning). Where a disallowance arises for a relevant group company but the finance income in question is received by a UK group company which is not a relevant group company (i.e. because it is not a 75% subsidiary) then Part 8 provides for the finance income to be reduced. ANTI-AVOIDANCE PROVISIONS (PART 6) The anti-avoidance rules in Part 6 are split into three main sections: the first combats 'schemes' designed to manipulate the Gateway Test (Part 2); the second combats 'schemes' manipulating the main comparison test and the exemption of certain financing income (Parts 3 and 4); and the third combats 'schemes' manipulating intra-group financing income (Part 5). HMRC considers that all the anti-avoidance rules in Part 6 have wide scope. Each of the anti-avoidance rules are subject to a purpose test (paragraphs 47(3) and 48(2)) such that they only apply if the main purpose, or one of the main purposes, of entering into the 'scheme' is to frustrate the worldwide debt cap rules. 'Scheme' (paragraph 53(1)) is drafted widely and regulations may be made under paragraph 53(2) to designate 'excluded schemes' to which the anti-avoidance provisions in Part 6 will not apply. Schemes that manipulate the Gateway Test But for the Gateway Test anti-avoidance rule (paragraph 47), a group that was going to breach the Gateway Test could borrow externally at the end of its period of account to boost its WGD, thereby passing the Gateway Test, and then repay the loan the next day. The anti-avoidance rules would frustrate this scheme, provided that the purpose test was satisfied, by overriding the result of the Gateway Test such that Schedule 15 applies. Schemes that reduce the amount of a disallowance The anti-avoidance rule in paragraph 48 seeks to counter schemes that manipulate TEA, TIA or AA or any combination of these three. The rule looks at the aggregate effect of these three amounts the 'relevant net deduction' ('RND') (paragraph 49), which is so much of TDA as cannot be covered by a disregard (under Part 4) of UK group company financing income. The anti-avoidance rule requires a comparison to be made between the effect of the actual scheme and the effect of an alternative scenario based on the assumptions that the scheme was not entered into and that, if the worldwide debt cap had been ignored, anything more likely than not to have been done or not done was done or not done respectively (paragraph 50). If the scheme breaches the purpose test and is not an excluded scheme and the result of entering into the scheme is that: Olswang LLP

9 (a) the sum of the profits of the UK group companies chargeable to corporation tax is less than if that sum was calculated on the assumptions in paragraph 50; or (b) the sum of losses of UK companies that arise and are capable of being carried backward or forward is greater than the sum of such losses calculated on the assumptions in paragraph 50, then, the anti-avoidance rule operates to charge the UK group companies to corporation tax on the amount calculated on the assumptions in paragraph 50. HMRC give the following example of where this anti-avoidance rule will apply. If a UK member of the group has a loan from its overseas parent that is outstanding, it could pay a lump sum to a bank in order for the bank to take on the obligation to pay the interest due on the loan from the overseas parent. This would reduce the company's FEA as the debits representing the amortisation of the lump sum are in respect of a related transaction (CTA 2009 s 304) and are therefore excluded from the definition of FEA (paragraph 54(3)(c)). The reduction of FEA means that TEA and NFD are reduced. Based on the assumptions in paragraph 50, the company may not have paid the lump sum to the bank but for the worldwide debt cap. Provided that the company paid the lump sum to the bank with the purpose of reducing its RND, then the anti-avoidance rules will operate with the effect that the company is taxed on the basis that it had not paid the lump sum to the bank. HMRC also point out that if the overseas parent decided to replace the debt with equity, then, although this could have been motivated by WDC rules, the anti-avoidance rules will not bite because replacing the loan with equity would not decrease and would probably increase the corporation tax payable by the UK group company (the first test in condition B in paragraph 48(3)(a) would therefore not be satisfied). Schemes that manipulate the rules in Part 5 The rule in paragraph 52 seeks to counteract schemes the main purpose, or one of the main, purposes, of which is to secure that any financing income satisfies the conditions in paragraph 40 and is therefore excluded from corporation tax. The anti-avoidance rule, if it applies, operates by treating the conditions in paragraph 40 as not met in relation to that financing income. SOME OBSERVATIONS The debt cap rules have little or nothing to do with the arm's length principle upon which other interest relief restrictions are generally based. Groups with no external funding will not be able to obtain any deduction in the UK for intra-group financing costs. The rules can produce seemingly arbitrary results in that two UK companies engaged in the same transactions and making the same profits from those transactions can have very different tax results depending upon the relative levels of external debt of their respective groups. The Government's response to this is that it is unacceptable for groups to get interest relief in the UK in excess of their worldwide interest. In answer to the accusation that the legislation is arbitrary they say that the result only appears arbitrary if you look at each company in the group in isolation whereas in reality worldwide groups operate as an economic unit and it is artificial to view each company in isolation. The debt cap looks at what is happening overall in the worldwide group in line with that economic reality. Olswang LLP

10 By its nature the impact of the debt cap will depend upon how the foreign parent and the foreign group are generally funded. This may have little or no relevance to, or overlap with, the UK companies impacted by the rules. Any internal loan into the UK by a cash rich group with no external debt will be impacted (i.e. no relief in the UK for financing expenses). Cash rich groups will be penalised as compared to indebted groups and encouraged to gear up with external debt. Whilst the Gateway Test may assist in filtering out some groups it is of limited use. For example, strangely, a wholly UK group within the scope of the rules (see below) will (it seems) inevitably fail the Gateway Test and 'net asset companies' (not a statutory term) are effectively ignored in applying the Gateway Test. The legislation will produce a heavy additional compliance burden. There are likely to be many cases where the Gateway Test is breached but the end result of the application of the rules (after the application of Part 3 and Part 4) is no overall disallowance. The debt cap can be avoided by the UK business borrowing externally subject to the impact of the antiavoidance provisions. Box 1: Gateway Test: not breached Error! Objects cannot be created from editing field codes. Error! Objects cannot be created from editing field codes. WGD = = 400 UND = < 75% of 400 Therefore, UND = < 75% of WGD Gateway Test therefore not breached and Schedule 15 does not apply for the period. NB: (1) Shareholder debt is external (2) Intra-group loan to O/S Sub is irrelevant but Bank loan to O/S Sub is critical Box 2: Gateway Test: breached Olswang LLP

11 Error! Objects cannot be created from editing field codes. WGD As Box 1, = = 400 UND = > 75% of 400 Gateway Test therefore breached. NB: (1) Assume UK SubCo 2 has net relevant assets (e.g. loans to third parties) of 50. Although this reduces the "true" UK net debt to 270 (and therefore less than 75% of 400) UK SubCo 2's NDA is zero (not minus 50) and therefore its net relevant assets do not help. The Gateway Test is still breached. (2) However, if UK SubCo 1 has relevant assets of, say, 40 (e.g. cash on deposit at bank) this reduces its NDA to 280 and therefore reduces UND to 280 which is less than 75% of WGD (WGD itself is unaffected by relevant assets as it looks only at 'relevant liabilities'). Box 3: calculating TEA and AA 5 Error! Objects cannot be created from editing field codes. Error! Objects cannot be created from editing field codes. All numbers are in '000s UK 1 UK 2 UK 3 UK 4 Totals FEA/FIA TEA FEA 6, ,200 7,800 FIA (1,800) 0 (1,200) (600) (3,600) NFD 4, ,200 5,400 TEA is 5,400 (NB: not 4,200, because UK 3's FIA exceeds its FEA and so its NFD is treated as zero). The group's gross consolidated finance expense is 3,000 being the amount payable to the Bank. This is AA. So, the disallowance is 2,400 (5,400 3,000). 5 This example is based on an example from a document on the design and function of the WDC released by HMRC on 7 April Olswang LLP

12 Mark Joscelyne is a Partner with Olswang LLP and can be contacted on mark.joscelyne@olswang.com and Hugo Webb is an Associate with Olswang LLP and can be contacted on hugo.webb@olswang.com and Olswang LLP

13 About Olswang Olswang is a leading business law firm with a distinctive approach. Our pioneering and problem-solving ethos has established a commanding reputation in the technology, media and real estate sectors, as well as a wide range of other industries. Founded in 1981, our Firm has grown to a team of over 650, including more than 100 partners, across four European offices. In addition, Olswang has a long-established best friends' network of leading independent law firms throughout the world. Our Firm continues to be acknowledged as a leading practice in many of our core areas: Olswang was voted TMT Team of the Year 2009 for the second year running at the annual Legal Business Awards; Olswang's Corporate Group won M&A Law Firm of the Year at the M&A Awards 2008 in conjunction with M&A Magazine, and was named Corporate Team of the Year Mid markets at The Lawyer Awards Resourceful drive and a climate of shared knowledge and empowerment are the hallmarks of our meritocratic, unstuffy culture. For the last five years Olswang has been ranked in The Sunday Times 100 Best Companies to Work For and our strong management team is dedicated to the personal and professional development of our people. Olswang is committed to being a responsible business and has developed Corporate Responsibility programmes that allow us to actively manage the social and economical impact of the Firm's activities. For example, through our Green initiative we recycle almost 90% of our waste and on the 1 May 2009 Olswang achieved CarbonNeutral accreditation. As part of our Corporate Responsibility strategy we also encourage every member of staff to engage in lasting and meaningful pro bono and volunteering activities, both legal and non legal. We recruit personalities with a genuine fascination and notable reputation in the sectors they focus on, which is reflected in the quality of our advice. We also understand the importance of achieving our clients goals and ensure that our advice is, above all else, practical. From world-class businesses to entrepreneurial startups, the rich diversity of our client base ensures a broader perspective and, as a result, deeper commercial insight. Transactional work is the most obvious feature of the role we perform. However, ongoing non-transactional support is an integral part of our business, and we focus on creating long-term relationships with our clients. We employ a range of proactive initiatives such as client care programmes, secondments, client training and feedback sessions to ensure our client relationships are strong. At Olswang the passion of our lawyers, the confidence of our approach and the commercial edge to our advice provide a unique and compelling service. Olswang LLP

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