Corporate Interest Restriction
05/07/23
The Corporate Interest Restriction (CIR) legislation limits the tax relief a company or group of companies can claim for deducting net interest and other financing costs to £2m per annum. With interest rates rising, the Corporate Interest Restriction will inevitably affect many more companies and groups going forward. Joel Calitchi sets out a brief overview of the CIR legislation.
Background
The CIR applies to companies or groups of companies whose net interest and financing costs exceed £2m in a 12-month period.
This de minimis has remained unchanged since the restriction came into force on 1 April 2017. With interest rates rising rapidly over recent months and showing no signs of coming down, the CIR legislation will inevitably affect many more companies and groups going forward.
If a company or group’s net interest and financing costs are more than £2m, they should appoint a reporting company within 12 months of the end of the period of account.
CIR return
The reporting company must submit an Interest Restriction return working out the group’s ‘interest allowance’. This is the maximum amount of net interest and financing costs a group of companies can deduct in a period of account.
There are two methods of calculating this allowance, the ‘fixed ratio method’ or the ‘group ratio method’. The method that gives the largest allowance should be used.
Fixed ratio method
Under the fixed ratio method, the interest allowance is the lower of:
- 30% of the group’s UK taxable profits before interest, taxes, capital allowances and some other specific items, and
- the group’s worldwide net interest expense.
Group ratio method
Under the group ratio method, the group’s own level of gearing is taken into account, and a group-specific ratio is used instead of the standard 30%.
The group ratio percentage is the group’s worldwide net interest expense owed to unrelated parties divided by the group’s overall EBITDA.
Under the group ratio method, the interest allowance is the lower of:
- the group ratio percentage multiplied by the group’s taxable UK profits before interest, taxes, capital allowances and some other specific items, and
- the group’s worldwide net interest expense owed to unrelated parties.
Recent changes to the regime
Previously, when a group did not nominate a reporting company on time, HMRC would make an appointment on the group’s behalf. HMRC will no longer do this.
As some favourable treatments and elections are only available to groups with a reporting company, this might disadvantage some taxpayers. HMRC can still appoint a reporting company if it believes tax may be at stake.
Planning opportunities
If your group of companies is likely to reach the £2m de minimis per annum, it is advisable to plan ahead and consider the timing of the many elections available to mitigate interest restrictions and higher tax liabilities.
The above is general advice concerning the Corporate Interest Restriction. If you have any queries about this topic, please contact Joel Calitchi at joel.calitchi@mgr.co.uk
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.
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