Businesses may now be finding themselves being caught by the Corporate Interest Restriction (often abbreviated to “CIR”) rules.

What is the Corporate Interest Restriction?

Broadly speaking, interest income is taxable and interest expenditure is tax deductible for Corporation Tax purposes in the UK.

The Corporate Interest Restriction (CIR) rules were introduced in April 2017 and restrict the deductibility of a group of companies’ interest expenditure where its UK interest expense exceeds £2m a year.

In theory, these rules can apply to standalone companies too, but in practice, this is rare and will largely be applicable to large groups.

What companies are caught by the CIR rules?

The CIR legislation states that the rules operate on a “worldwide group” basis – but what is a worldwide group?

A worldwide group will consist of the ultimate parent  and all its consolidated subsidiaries . To determine the ultimate parent, you’ll need to work up the group structure to the highest consolidated entity, i.e. a company that is not consolidated into any other.

There are some exemptions and exceptions, and potentially occasions where consolidated financial statements aren’t prepared where they should be, so there’s lots to bear in mind!

Establishing the worldwide group is a vitally important step as will impact which companies are to be considered within the calculation – the impact of getting this wrong could be significant, so shouldn’t be underestimated.

A group of companies has financing costs exceeding £2m, how much of this will be deductible?

Where a group’s net interest expense exceeds £2m, the group will be required to prepare and file a CIR return, regardless of whether or not there is a restriction.

There are two methods that can be used to calculate the amount of interest that is fully tax deductible. The fully deductible/allowable interest is called a group’s “interest allowance”.

The two methods of calculating the interest allowance are as follows:

• Fixed ratio (this is the default method)
  
• Group ratio (an election must be made to use this method)

Generally, the group ratio method will be beneficial to groups who’s worldwide gearing is higher than the gearing of the companies subject to UK Corporation Tax. Otherwise, the default method of the fixed ratio is more commonly used.

A de minimus (minimum allowance) of £2m is applied, so if interest allowance is calculated as less than £2m, this will be the default amount of allowable interest.

The difference between the interest allowance and the net interest expense is the balance of the interest to be restricted and disallowed for Corporation Tax purposes.

The calculation of a group’s interest allowance under both methods uses the worldwide group’s consolidated EBITDA and consolidated interest expense balances (an example of why establishing the worldwide group is important!).

A group has financing costs of less than £2m – do they need to do anything for CIR?

Where a group’s net interest expense is less than £2m, there will be ‘unused interest allowance’. This means the amount of allowable interest is more than the actual interest incurred. The unused allowance can be carried forward five years and can be used to reduce a future interest restriction.

In order to benefit from this, the company must file an abbreviated return in order to ‘bank’ the unused interest allowance.

An abbreviated return is much shorter than a full return and may only be used where the company is not subject to a restriction.

Is there much admin involved?

A group is required to appoint a reporting company, who is then responsible for filing the group’s CIR return to HMRC. The reporting company must be an active UK company.

Once a reporting company has been appointed, CIR returns must be submitted for every period of account, including where there is no restriction. As previously mentioned, an abbreviated return can be filed in the place of a full return where there is no restriction.

Where a group doesn’t have a restriction and doesn’t wish to bank any excess interest allowance, the reporting company appointment may be revoked. Revoking the appointment would remove the requirement to submit a return.

What are the deadlines?

You must appoint the reporting company within 12 months of the end of the accounting period you wish to file a return for.

The reporting company must then submit the group’s CIR return within 12 months of the end of the reporting period e.g. the CIR return for a 31 December 2024 year end must be submitted by 31 December 2025. The CIR return must be filed with HMRC electronically.

Where CIR returns are late, the group can be liable for late filing penalties so it’s important to ensure this is timely.

How can RL help?

Here are some examples of how we can help:

• Calculating disallowance and feeding this into tax computations, plus completion and submission of CIR return.
  
• Consideration of how the rules might impact quarterly instalments.
  
• Consideration as to whether abbreviated returns might be beneficial, even where net interest expenditure is under £2m.

To discuss your particular circumstances in more detail, please contact us .