Corporation Tax Act 2010 section 543

Profit: financing-cost ratio

Section 543 sets out the profit-to-financing-cost ratio test for UK REITs and the tax consequences when a REIT's property financing costs are too high relative to its property profits.

• A UK REIT must maintain a ratio of property profits (PP) divided by property financing costs (PFC) of at least 1.25 for each accounting period; if the ratio falls below this threshold (and is not nil or negative), a tax charge arises on the excess financing costs.
• The taxable excess is the lower of (a) the amount by which actual PFC exceeds the level of PFC that would produce a ratio of exactly 1.25, or (b) 20% of PP; this excess is charged to corporation tax as income and treated as residual business profits taxed at the main corporation tax rate.
• No losses, deficits, expenses or allowances may be set off against the excess amount, ensuring the tax charge cannot be reduced or eliminated by other relievable amounts.
• HMRC may waive the tax charge if the company was in severe financial difficulties, the ratio breach arose from unexpected circumstances, and the company could not reasonably have taken action to prevent it; the Treasury may make regulations specifying the criteria HMRC must apply when considering such a waiver.