D1.1480 Debt cap provisions—overview
The debt cap provisions were repealed from 1 April 2017 and replaced by the corporate interest restriction regime (CIR). The CIR places a limit on the amount of interest expenses and certain other financing costs that large businesses can deduct when calculating the profits subject to corporation tax. See D1.1401–D1.1470.
For UK companies of 'large worldwide groups' there may be a restriction of corporate tax relief for finance expenses1 where certain conditions are met. These rules (frequently referred to as the worldwide debt cap rules) generally apply to accounting periods beginning on or after 1 January 2010 and aim to complement the UK corporate tax exemption for foreign dividends, which applies from 1 July 2009 (Division D5.1).
Very broadly, the rules will apply where the UK net debt of the group exceeds 75% of the worldwide gross debt of the group (referred to in this commentary as the 'gateway test').
There are however two useful reliefs. If the net debt of a particular company is less than £3m, it is ignored — since it is treated as nil. Similarly, where a relevant company remains dormant throughout the relevant period of account, its net debt is also deemed to be nil.
In essence, the purpose of the debt cap provisions is to limit the tax deduction for interest and other finance expenses of UK companies in large groups. The deduction is limited to the amount of external interest and other finance expense of