The UK Government has published details of its proposed worldwide debt cap. This will place an upper limit on the amount which UK companies can obtain tax relief for group financing expenses. This limit should, however, not restrict tax relief for the funding costs of most third party debt (for example, interest on facilities from third party banks) as it will, generally, only apply to intra-group financing expenses (including the financing element of certain finance leases, and debt factoring arrangements).

Calculating the amount of the restriction may not be straightforward. It requires two figures to be calculated, and then compared to each other. The first amount (the tested amount) is the (internal) financing expenses of the UK members of the group. This is the most that can be disallowed. The second amount (the available amount) is the net external financing expenses, as set out in the consolidated accounts, of the worldwide group which the UK companies are members of. As the worldwide debt cap does not deny tax relief for the funding cost of most third party debt, the corollary is that such financing is excluded from the available amount. The available amount determines the amount actually denied - relief is denied to the extent that the tested amount exceeds the available amount.

As the cap operates by reference to the worldwide group's level of external financing expenses, it will favour more highly externally leveraged groups. These groups will be able to locate more tax-deductible debt in UK companies than will groups which are not so highly leveraged. Of course, as other restrictions on funding costs will continue to apply, a UK company may be denied tax relief for funding costs even though its net intra-group financing expenses are less than the worldwide group's net external financing expenses; for example, if that UK company is thinly capitalised, or within anti-avoidance rules (which are being extended at the same time).

The worldwide debt cap does operate in a simpler manner than the interest allocation rules operated in other jurisdictions, and which were rejected by the UK Government. However, the proposed cap is not without difficulties and complexities; for example, special provisions are required to apply it to certain financial institutions (such as banks and insurance companies) and others required to hold regulatory capital.

The rules could come into force later this year, although the exact date will be determined by a Treasury order.