Commentary

D1.1401 Overview and mechanics of the corporate interest restriction

Corporate tax
Corporate tax | Commentary

D1.1401 Overview and mechanics of the corporate interest restriction

Corporate tax | Commentary

Division D1.14     Corporate interest restriction and worldwide debt cap

Revised by JOHN LINDSAY BA, FCA, FTII

Consultant, Linklaters

For updates affecting this Division please see Part D0 Updates

Corporate interest restriction—introduction

D1.1401 Overview and mechanics of the corporate interest restriction

In most instances, a company's financing income and expenses are taxed or relieved under the loan relationships regime. There are several different sets of rules governing the amount and timing of the tax deductions which are available.

However from, broadly, 1 April 2017 additional rules were introduced which restrict corporate interest deductions1. The policy objective behind these rules is to ensure that the relief given for financing costs is commensurate with the business activities subject to corporation tax in the UK. This legislation is often referred to as the corporate interest restriction (CIR) legislation and applies to a wide range of interest and interest-like transactions such as:

  1.  

    •     most loan relationship debits

  2.  

    •     some derivative contract debits

  3.  

    •     the finance cost element of certain arrangements or transactions involving finance leasing, debt factoring or service concession arrangements

The legislation in this area uses the term tax-interest expense to include all the financing costs listed above2. For simplicity, the term interest is used in this commentary.

The legislation to implement this restriction is lengthy and complex. The main HMRC guidance is contained in the Corporate Finance Manual at CFM95000 onwards. HMRC has also published guidance at www.gov.uk/guidance/corporate-interest-restriction-on-deductions-for-groups.

The main driver behind these rules was the OECD Base Erosion and Profit Shifting (BEPS) project which has delivered two key reports

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