Corporate interest restriction compliance

The CIR rules apply to all companies liable to UK corporation tax and restrict the amount of deductible interest and other allowable financing costs in some situations.

A potential restriction occurs where the annual tax-interest expense exceeds £2 million. This limit is shared between companies in the same worldwide group, which is given the usual meaning for the purposes of accounting consolidation. Wherever two companies share a common ultimate parent, their aggregate tax-interest expense should be considered. “Tax-interest expense” has a similar but not identical meaning to accounting interest expense.

Taxpayers that do not currently exceed the £2 million limit but expect they might do so in the future should also consider the rules. There may be an opportunity to bank an interest allowance for relief in future periods.

The rules and calculation are complex. There are several elections available that need to be considered to reach the most favourable outcome. For example, whether to use the fixed ratio method or the group ratio method will often be the first key decision. Even without specific elections, businesses must consider concepts such as the modified debt cap.

A return is only required where a reporting company has been appointed (see “How do we submit a CIR return?”). This can happen if the company, the group or HMRC appoints one.

A company or group must appoint a reporting company if it will be subject to an interest restriction under the rules or it wishes to submit a CIR return. The group will be notified in writing if HMRC appoints a reporting company.

Although a potential restriction only occurs in a period where the tax-interest expense exceeds the £2 million limit, taxpayers who anticipate potentially exceeding this in future may also be advised to submit returns. This allows a group to bank an allowance arising in one period to reduce future restrictions.

Where companies form part of the same worldwide group, the group companies share the single minimum threshold. Where there is more than one group member chargeable to UK corporation tax, only one company is required to submit a return on behalf of the entire group. This is the reporting company.

In some cases, HMRC will appoint a reporting company itself. Where notification is received that it has done so, submission of an interest restriction return is required.

Where there is a requirement to file a CIR return, the deadline is the later of 12 months from the end of the period of account of the worldwide group and, where the reporting company was appointed by HMRC, three months after the date on which the reporting company was appointed.

A worldwide group should first appoint a reporting company to prepare and submit its CIR return to HMRC. The reporting company must not be dormant and must itself be subject to UK corporation tax for at least part of the period covered by the return. The initial appointment should be notified to HMRC within 12 months of the end of the specified period of account. This will be valid for both the specified and all subsequent periods of account, unless HMRC is notified that a new reporting company has been appointed.

There are two formats for the return: full or abbreviated. A full return is required where there is an interest restriction in the period. Where there is no restriction, an abbreviated return may be prepared, but a full return is required where a group intends to use any excess capacity in a future period.

Where a return is filed, the deadline is the later of 12 months from the end of the period of account of the worldwide group and, where the reporting company was appointed by HMRC, three months after the date on which the reporting company was appointed. 

A full corporate interest restriction return must contain details of all the relevant companies in the worldwide group. It should set out a statement of calculations to include details of the tax-interest and tax-EBITDA figures for all companies, any disallowance in the period and how this will be allocated between group companies. It should also contain a statutory declaration and any elections made.

An abbreviated return can only be submitted where the group is not subject to any interest restriction for the period. The submission must still include details of all the relevant companies in the worldwide group along with a statutory declaration that there is no restriction in the period. No calculation is required.

A group that is not subject to an interest restriction is not obliged to appoint a reporting company or file a return, unless HMRC appoints a reporting company. The key incentive to file a return in such circumstances is that this allows the group to carry forward any unused interest allowance to reduce restrictions in later periods.

Once a return is filed for a period in which no restriction arises, a revised return may be submitted at any time up to 60 months after the end of the period to which the return relates. Filing an abbreviated return allows companies to access the interest allowance from periods up to five years prior, while reducing the immediate compliance burden of a full return.

The short answer is yes, subject to specific time limits. Where a restriction applies, revised interest restriction returns must be submitted by the later of 36 months from the end of the period of account and three months after the appointment of the reporting company. Within these time limits, there is no maximum number of revisions that can be submitted. Any new submission will simply be treated as superseding all prior submissions.

Where an amendment to the UK corporation tax return of an individual group member impacts the CIR return, the CIR return will need to be revised. In this case, the revised interest restriction return must be submitted within three months of receipt of the amended individual corporation tax return by HMRC.

An extended time limit applies where the worldwide group is not subject to an interest restriction in the period, and an abbreviated return is submitted. A full interest restriction return may be submitted 60 months after the end of the relevant period of account. This extended time limit allows a group subject to restriction for the first time to resubmit previously filed abbreviated returns as full returns. This potentially enables the group to reduce restrictions using brought forward allowances. 

It is possible. Where a group has been subject to an interest restriction in the past, and in a later period of account, its interest expense falls below the amount that would be allowable in that period, it is possible to reactivate previously disallowed amounts.

Reactivation is not automatic and is not always available. The rules are, however, designed to eliminate unfair permanent disallowances that could otherwise arise from short term situations or fluctuations.

The rules around reactivation are complex. Please don’t hesitate to get in touch to discuss these.

Lessee accounting under IFRS 16 usually results in an interest expense being recognised in the profit and loss account, resulting in some interaction with the CIR rules.

For periods of account beginning on or after 1 January 2019, IFRS 16 removes the distinction between finance and operating leases. Instead, it requires assets and liabilities from all but exempt lease agreements to be recognised on the balance sheet.

For CIR purposes, however, this distinction remains important. Interest expenses relating to leases that would previously have been classified as operating leases under IAS 17 are not restricted under CIR and will need to be removed from calculations. On the other hand, interest expenses relating to leases that would previously have been classified as finance leases must be factored into calculations and may be subject to restriction.

The fixed ratio method is the default method but an election may be made in the CIR return to apply the group ratio method instead. This election is revocable, so a group can decide from period to period whether it wishes to use the fixed ratio or the group ratio method.

The fixed ratio method restricts UK interest deductions above the £2 million limit to the lower of:

• 30% of the UK tax-EBITDA (a measure similar to accounting EBITDA, but with additional tax adjustments taken into account)
• a measure of the worldwide group’s net external finance expense (see ‘What is the modified debt cap for the CIR calculation?’)

The group ratio is a more variable method based on the relevant profile of the entire worldwide group. Whether or not an election is advantageous will depend on the exact circumstances, but the broad intention of the rules is to stop UK resident companies from being unfairly penalised for high interest costs in situations where the entire worldwide group is similarly highly leveraged with external debt.

The rules are complex, and significant work is often required to determine the best approach, but for groups with substantial interest costs the resulting tax benefits often far outweigh the costs. Please get in touch to discuss the implications for your business.

The modified debt cap has two forms: the fixed ratio debt cap or the group ratio debt cap, depending on the calculation method chosen. The word “modified” distinguishes the concept from the old worldwide debt cap rules, which were repealed for accounting periods beginning on or after 1 April 2017.

The fixed ratio debt cap is relevant where the fixed ratio method is used, and the group ratio debt cap is relevant under the group ratio method. The two measures are slightly different, but both place an absolute cap on the interest deduction available in the UK. This is in addition to the limit imposed by the relevant ratio of tax-EBITDA in each case. The starting point for the debt cap in both cases is the net accounting interest expense in the consolidated accounts of the ultimate parent of the worldwide group. A series of steps and adjustments are made to reach either the fixed ratio debt cap or the group ratio debt cap.

The broad aim of the debt cap is to ensure that amounts available for deduction in the UK are proportionate to the costs in, and position of, the overall worldwide accounting group. For example, a group with no external financing costs but large interest expense balances in the UK on intercompany loans with overseas group companies is likely to be subject to a debt cap restriction.

The adjustments referred to above can be complex. For further information, please get in touch with our experts.