Corporate interest restriction ― group ratio method

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Corporate interest restriction ― group ratio method
  • Introduction
  • The key steps in calculating the group ratio restriction
  • Calculating QNGIE
  • Calculating group-EBITDA
  • Calculating the GRP
  • Applying the group ratio method
  • Dealing with fair value movements on derivatives
  • Planning points to minimise a disallowance
  • Elections impacting QNGIE or group-EBITDA

Introduction

The group ratio method is an optional method available by election to groups whose gearing worldwide is higher than the gearing of the companies subject to corporation tax in the UK. The election is a core part of the corporate interest restriction (CIR) rules, which apply from 1 April 2017. For a general overview of the regime, see the Introduction to the corporate interest restriction guidance note and related examples, which should be read prior to reading this guidance note.

The default fixed ratio seeks to limit the deductibility of interest to 30% of ‘tax-EBITDA’, although, this is subject to a second cap, sometimes referred to as the ‘modified debt cap’.

References in this guidance note are to HMRC’s guidance . This guidance is in the process of being transitioned into the Corporate Finance manual but until all the content is available in the manual, it is necessary to refer to the guidance .

The latest version, published on 28 February 2018, includes commentary on additional technical changes to ensure the regime works as intended, which have since been legislated as Finance Act 2018, s 24 and Sch 8.

Overview of the group ratio method

Where a group’s net interest expense in a period of account would exceed the maximum given by the fixed ratio method, a group may elect to calculate its interest allowance using the ‘group ratio method’ instead.

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Broadly, this method calculates a group’s interest allowance by replacing the fixed ratio of 30% with a group ratio percentage (GRP). The GRP reflects the proportion that the net external interest expense of the worldwide group bears to the EBITDA of the worldwide group (based on the figures contained in the group’s consolidated accounts).

This method is also subject to a debt cap (the ‘group ratio debt cap’), which, unlike the fixed

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