The above legislation has now been published together with the relevant Explanatory Memorandum.

The policy underlying the debt cap legislation is to restrict the deductions that the members of a worldwide group of companies which are subject to corporation tax (that is, UK companies and those non-UK companies carrying on a trade in the UK through permanent establishments) are permitted to make for financing expenses incurred in transactions between members of the group.

This is done by disallowing a deduction for the financing expenses of the companies which are subject to corporation tax, to the extent that the total of their net financing expenses exceeds the financing costs disclosed in the consolidated accounts of the group as a whole.

Where a deduction is disallowed for an amount of financing expenses, a corresponding amount of financing income may be exempt from corporation tax. The worldwide group is required to allocate disallowances and exemptions among members of the group.

These new Regulations (effective for accounting periods beginning on or after 1 January 2010), alter the way in which the available amount is calculated in specified circumstances where in relation to a financial arrangement an amount disclosed, if any, in the consolidated accounts of the worldwide group in respect of a financing cost is not equal to the financing expense amount brought into account for corporation tax purposes.

The Regulations thereby target the disallowance of deductions more closely on excessive financing expenses incurred in transactions between group members.

The Regulations and Explanatory Memorandum can be accessed at http://www.legislation.gov.uk/uksi/2010/3025/contents/made