Corporate Interest Restriction
When might you face a restriction?
From 1 April 2017, if your company or group has more than £2 million of net interest and similar financing costs, the Corporate Interest Restriction rules may restrict interest deductions for UK corporation tax purposes.
Groups do not need to consider the Corporate Interest Restriction rules if they have interest expense totalling less than £2 million per annum and are not expected to exceed the £2 million limit in future years.
Although these rules were originally targeted at groups with offshore companies, they do also apply to UK-only groups. Certain companies may be eligible for an exemption where they carry out public infrastructure activities or the letting of commercial buildings, but the exemptions are subject to strict conditions.
How is the restriction calculated?
The rules are complex but broadly look to restrict UK interest deductions for a group’s interest expense above £2 million to either:
- 30% of EBITDA of the group for the period, as adjusted for tax purposes; or
- a ‘group ratio’ percentage of the tax adjusted EBITDA of the group for the period;
The ‘group ratio’ is optional and allows a higher ratio of financing expense where groups are highly leveraged with third party debt.
The interest deduction cannot exceed the adjusted net group-interest expense, which broadly means the net interest expense of the group. If interest cannot be deducted in an accounting period, it can be carried forward. If there is excess capacity for interest deduction (the amount of deductible interest is less than the limit), the excess capacity can be carried forward for up to five years.
What are the Practical Implications for Groups?
Groups that are caught by the CIR must submit a separate, CIR return. The CIR return calculates the restriction and allocates it to members of the group. The return must be filed by the “reporting company” of the group, which should be notified in advance to HMRC.
As always, there are strict time limits and detailed guidance can be found on HMRC’s website.
If you would like to discuss the corporate interest restriction rules in more detail and how these may affect your company, please contact Carolyn Tunstall or a member of our tax team on 01772 821021.