The modified debt cap has two forms: the fixed ratio debt cap or group ratio debt cap, depending on the calculation method chosen. The word ‘modified’ is used to distinguish the concept from the ‘debt cap’ under the old worldwide debt cap rules, which were repealed for accounting periods beginning on after 1 April 2017.
The fixed ratio debt cap is relevant where the fixed ratio method in used, and the group ratio debt cap is relevant under the group ratio method. The two measures are slightly different, but both place an absolute cap on the interest deduction available in the UK. This is in addition to the limit imposed by the relevant ratio of tax-EBITDA in each case. The starting point for the debt cap in both cases is the net accounting interest expense in the consolidated accounts of the ultimate parent of the worldwide group. A series of steps and adjustments are then made to reach either the fixed ratio debt cap or the group ratio debt cap. The broad aim of the debt cap is to ensure that amounts available for deduction in the UK are proportionate to the costs in, and position of, the overall worldwide accounting group. For example, a group with no external financing costs, but with large interest expense balances in the UK on intercompany loans with overseas group companies is likely to be subject to a debt cap restriction.
The adjustments referred to above can be complex. If you require any further information, please do not hesitate to get in touch with our experts.