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This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Example of section 322 election

A worldwide group consists of three companies, B Ltd (the ultimate parent of the group, UK resident), A Ltd (100% subsidiary of B, also UK resident), and C (100% subsidiary of A, resident in Belgium). All three companies prepare accounts to 31 December.

The position of the two UK companies in year ended 31 December 2011 is as follows:

B Ltd

B Ltd has borrowed from an external bank. In year ended 31 December 2011, interest of 拢1.2 million is payable on the external debt.

It on-lends the amount it has borrowed to A Ltd, taking a small turn. It receives interest of 拢1.25 million from A Ltd in the period.

B Ltd also owns the group鈥檚 trading premises, which it leases to A Ltd. It receives rental income of 拢0.5 million in the period. In addition, it receives interest of 拢0.6 million in the period on a portfolio of government and corporate bonds. It has no other income.

B Ltd also has a non-trading loan relationship deficit of 拢1 million brought forward from year ended 31 December 2010.

A Ltd

A Ltd pays interest of 拢1.25 million to B Ltd in year ended 31 December 2011. It also pays interest of 拢300,000 on a loan from the non-resident company, C.

Corporation tax position of A Ltd and B Ltd before debt cap applies

Ignoring debt cap the tax position of companies A and B will be as follows.

Company A has paid interest to Companies B and C and will have a loan relationship debit of 拢1.55m.

Company B has received interest of 拢1.85m and rent from Company A of 拢0.5m. It has paid interest of 拢1.2m and its CT computation will be:

-	拢
Property Income	500,000
Loan relationship profits (credits 拢1.85 million less debits 拢1.2 million)	650,000
Less NTLR deficit brought forward	1,000,000
Profits chargeable to CT	150,000
NTLR deficit carried forward	Nil

Debt cap position without a section 322 election

The bank loan to B Ltd is the group鈥檚 only external borrowing. The available amount is therefore 拢1.2 million.

A Ltd has financing expense amounts of 拢1.25 million (on its loan to B) and 拢0.3 million (on its loan to C). It therefore has a net financing deduction of 拢1.55 million.

B Ltd has financing expense amounts of 拢1.2 million and financing income amounts of 拢1.85 million. It therefore has net financing income of 拢0.65 million.

The group thus has a tested expense amount of 拢1.55 million. Its total disallowed amount will be 拢0.35 million (拢1.55 million less 拢1.2 million). This disallowance is allocated to A Ltd, reducing A Ltd鈥檚 loan relationship debits from 拢1.55 million to 拢1.2 million.

The group has a tested income amount of 拢0.65 million. It can therefore disregard 拢0.35 million of the financing income in B Ltd (this being the lower of the disallowed amount and the tested income amount).

B Ltd鈥檚 loan relationship profits are therefore reduced from 拢0.65 million to 拢0.3 million, and its CT computation will be:

-	拢
Property income	500,000
Loan relationships profits (credits 拢1.85m less debits 拢1.2m)	650,000
Disregard of financing income under Chapter 4 Part 7	- 350,000
Less NTLR deficit brought forward	- 800,000
Profits chargeable to CT	Nil
NTLR deficit carried forward	200,000

Companies A and B make a joint election under section 322

A Ltd and B Ltd elect to disregard 拢350,000 of A Ltd鈥檚 financing expense amounts. This 鈥榬elevant amount鈥� satisfies the condition in section 322 (7) since it is smaller than the non-trading deficit brought forward from previous accounting periods and set off by B Ltd against non-trading profits in its 2011 accounting period.

It follows that, under section 323, an equivalent 拢350,000 of B Ltd鈥檚 financing income amounts are disregarded. The debt cap calculations given above must be re-worked.

A Ltd鈥檚 net financing deduction is reduced from 拢1.55 million to 拢1.2 million.

B Ltd, which previously had financing income amounts of 拢1.85 million is now treated as having financing income amounts of only 拢1.5 million. It still has financing expense amounts of 拢1.2 million. It therefore has net financing income of 拢300,000.

It remains the case that A Ltd is the only company with a net financing deduction, so the tested expense amount is 拢1.2 million. This is the same as the available amount, so there is no disallowed amount.

As a result, there is no disregard of financing income in B Ltd under TIOPA10/PT7/CH4. B鈥檚 CT computation will be:

-	拢
Property income	500,000
Loan relationships profits	650,000
NTLR deficit	- 1,000,000
Profits chargeable to CT	150,000

The overall effect of the election is therefore to enable B Ltd to use the whole of its brought-forward deficit. A Ltd鈥檚 CT profits are reduced by 拢350,000 because there is no longer a disallowance under Chapter 3 of Part 7, while B Ltd鈥檚 profits are increased by only 拢150,000. The position of B Ltd before the debt cap is restored.