The corporate interest restriction in a nutshell
The corporate interest restriction limits the amount of interest (and other financing amounts) that a company may deduct in computing its profits for UK tax purposes. The rules aim to ensure that the UK tax relief given for financing costs is commensurate with the business activities that are subject to UK corporation tax.
This overview gives a summary of the corporate interest restriction and how the regime applies.
When does the CIR apply?
CIR applies to periods of account starting on or after 1 April 2017 where a worldwide group’s net interest expense in the UK exceeds its interest capacity – that is, in its simplest form, where the group's deductible UK financing costs are £2m or more than its UK financing income.
What is the worldwide group for CIR purposes?
A worldwide group for CIR purposes comprises the ‘ultimate parent’, wherever resident, and, if any, each of its subsidiaries wherever resident that are consolidated subsidiaries for the purposes of International Accounting Standards.
A worldwide group may therefore comprise companies resident only in the UK.
What is interest capacity?
The worldwide group's interest capacity is important because it is only to the extent that the group's aggregate net tax-interest expense exceeds its interest capacity that disallowances arise.
The worldwide group's interest capacity for a period of account is £2m (proportionately adjusted if the period of account is not 12 months long) or, if higher, the sum of its current and brought-forward 'interest allowance'.
The interest allowance is determined either under the fixed ratio method or alternatively (and by election) under the group ratio method.
What is the fixed ratio method under the CIR regime?
Under the fixed ratio method, the basic interest allowance for the group is the lower of:
- 30% of ‘aggregate tax EBITDA’ of each UK taxable group company, and
- the fixed ratio debt cap
In broad terms, the tax-EBITDA of a company is a measure of its earnings before interest, tax, depreciation and amortisation, but computed according to corporation tax rules. There are rules dealing with disregarded periods where company accounting periods do not coincide with the group’s period of account, or a company joins or leaves a group part way through a period.
The fixed ratio debt cap is ascertained by reference to the external net group-interest expense of the worldwide group based on the consolidated profit and loss account. While largely based on figures included in the consolidated accounts there are specific adjustments to align the measure more closely with the type and timing of amounts included in net tax-interest.
Any 'excess debt cap' generated in the group's immediately preceding period of account can also added to ANGIE in setting the fixed ratio debt cap.
What is the group ratio method under the CIR regime?
Under the group ratio method, which is optional and applies by election, the basic interest allowance for the group is the lower of:
- the 'group ratio percentage' of the group's aggregate tax-EBITDA for the period, and
- the group ratio debt cap for the period
The group ratio debt cap is again a measure of net external interest expense (referred to as the group’s qualifying net group-interest expense (QNGIE)). It is similar to the fixed ratio debt cap but excludes certain amounts such as those owed to related parties.
The group ratio percentage is computed by dividing the group’s QNGIE for a period of account by its group-EBITDA for the period. Accordingly, if the group ratio percentage is greater than 30% then the group ratio method may be preferable to the fixed ratio method.
How does CIR interact with other tax provisions that limit financing costs?
The CIR rules apply after other possible restrictions on interest deductibility such as the transfer pricing regime, the unallowable purpose legislation, the anti-hybrid rules and the rules on distributions. It may be that these other rules reduce a group’s tax-interest expense to a level that results in the CIR rules not being applicable.
What reporting requirements does CIR have?
There can be a significant compliance burden placed on groups subject to the corporate interest restriction, which is in addition to the normal corporation tax compliance cycle.
In most cases, groups will need to appoint a reporting company, which will submit an interest restriction return (either abbreviated or full) for each period of account, calculate the overall disallowance of interest expenses and allocate this between the UK corporation tax-paying group companies. HMRC can levy penalties for incorrect returns and for non-compliance with the administrative requirements of the regime.