At KNAV, we specialise in debt capacity assessments, helping businesses determine optimal borrowing limits while ensuring compliance with HMRC’s CTSA requirements. Our expert analysis, including interest rate benchmarking and credit rating evaluation, supports loan approvals, fairness opinions, and regulatory compliance, empowering clients to make informed financial decisions with confidence.
At KNAV, we specialise in assessing debt capacity, which refers to a company’s ability to assume debt and the maximum level of borrowing it can undertake while consistently meeting its financial obligations without operational hindrance. Understanding debt capacity is crucial for both lenders and borrowers, as it helps to delineate the limits of prudent borrowing and ensures that debt levels remain manageable.
In the UK, a comprehensive debt capacity analysis is essential for financial health and is a requirement of HMRC. As part of Corporate Tax Self-Assessment (CTSA) returns, businesses must provide a debt capacity analysis to ensure that finance costs align with the arm’s length principle and reflect genuine borrowing capacity. This analysis helps to prevent inflated finance cost claims and ensures compliance with tax regulations.
Interest rate benchmarking is a vital component of assessing debt capacity. At KNAV, we utilise a comparative industry ratio analysis to evaluate a company’s performance against industry norms. Our approach includes industry benchmarking and a detailed credit rating analysis, which involves calculating the Z-score for the company to assess its financial stability and creditworthiness.
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Debt capacity analysis plays a critical role in various scenarios:
Loan Approval
Banks often conduct debt capacity assessments to evaluate a business’s creditworthiness and its ability to repay loans. This analysis is crucial before approving any financing.
Fairness Opinions
Companies considering new debt, refinancing existing obligations, or engaging in significant debt-related transactions may seek a fairness opinion. This opinion evaluates whether the proposed terms and conditions of the debt are fair from a financial perspective, considering factors such as interest rates, fees, covenants, and other key terms of the debt agreement.
Compliance with CTSA
When preparing their CTSA returns, companies must ensure that their submissions adhere to the arm’s length principle, which requires them to report as if they were borrowing independently from a third-party lender, disregarding any group guarantees. This requirement triggers the necessity for a detailed debt capacity analysis.
By leveraging our expertise in debt capacity assessment and valuation services, KNAV helps businesses navigate the complexities of financial obligations, ensuring they make informed decisions that promote long-term stability and compliance in the UK market.
