The Corporate Interest Restriction (CIR) has a reporting regime that sits alongside companies’ CT600 filing obligations. The principle behind this is that the CIR operates at a group level, even where a ‘group’ happens to consist of a single company.
No company will have an automatic obligation to prepare or file a CIR return, this only comes about if the group elects a reporting company, or if HMRC appoints one for the group. Two very different time limits exist for these different routes, and it is notable that it is only possible for a group to appoint a reporting company in a relatively small window within six-months of the end of the period of account. HMRC has a longer window, up to three years from the end of the period (or longer if relevant tax computations can be altered).
Why should a group consider nominating a reporting company?
Given there is no obligation to appoint a reporting company to file a CIR return, it may not be apparent why a group may wish to do so. However, no appointed company means no CIR return so the primary reasons to nominate stem from benefits that can only be obtained through entries on a CIR return, for example:
- Most elections under the CIR rules can only be made in a CIR return
- Surplus interest allowances can only be carried forward if a return has been filed
- Interest disallowances may only be allocated at will to specific companies in a CIR return (otherwise the default is to pro-rate them)
- Interest reactivations may only be made if a CIR return is submitted.
If there is an interest disallowance under the CIR it is likely that HMRC would appoint a reporting company, based on its issued guidance. However, there is likely to be a delay in HMRC doing this and it can only make appointments on a period-by-period basis.
It is worth remembering that if some group members, or companies that have left the group during the period, do not wish to be bound by the reporting company, it is possible for them to elect to be ‘non-consenting companies’. This status limits the potential allocations of disallowances to the affected companies and may be relevant in groups with diverse management teams or minority shareholders.
What are the reporting requirements?
Once a reporting company has been appointed, it will be obliged to notify the other group members of its status and to prepare a CIR return (until such time as the appointment is revoked by the group). The return will need be filed on the later of:
- 12 months from the end of the period of account (but see below for changes to groups)
- 3 months from the appointment of the reporting company (primarily where HMRC makes an appointment)
- 30 June 2018 (only relevant for groups with periods ending between April 2017 and June 2017).
If a group has no interest restriction in a period, the reporting company can file an abbreviated return, which omits the detail of calculations. More information of the contents of returns may be found here.
Areas that could catch groups out include:
- A group is defined based on the holding company – therefore a company can be part of several groups during an accounting period and if a new holding company is inserted it is likely that an entirely new group would be formed. As the reporting deadlines usually run from the date first group ‘ends’, it is important that appointment of reporting companies should be considered for each relevant ‘group’ during the accounting period.
- Final figures might not be considered across the group until it is too late to appoint a reporting company for the period, especially if significant tax adjustments could be required.
- Certain delayed interest amounts, such as late paid interest or interest capitalised into the cost of stock, may make a return or elections beneficial when there would not appear to be disallowances.
- The group may have a period distinct from some or all UK group companies, complicating calculations (with CIR deadlines based on the group’s period), and multiple dates may need to be considered where there are multiple groups.
- The £2m annual de minimis is pro-rated for short periods.
If there is any doubt over the benefit or importance of a CIR return, it is prudent to appoint a reporting company for the group within the deadline.
Example - potential cost and complications of missing the nomination deadline
In this example, the ‘group’ is a single UK company, A Limited, with a 31 March 2018 year end, EBITDA of £10m and third party bank interest expenses of £4m – we assume no other tax adjustments are needed to accounts figures.
If A Limited does not elect itself as a reporting company by the deadline, 30 September 2018, it will not be able to file a CIR return.
As a consequence, it would not be able to make a group ratio election (ie opt to use its ratio of third party interest to EBITDA, up to 100%) and would need to apply the fixed ratio (30% of EBITDA) when assessing its interest capacity for the period.
A Limited would then file its CT600 tax return by 31 March 2019, showing a £1m restriction on its interest deductions.
A Limited would then hope that HMRC will appoint A Limited as a reporting company for its group (ie itself), requiring it to file a CIR return. If this occurs, a CIR return could then be made including a group ratio election, increasing the deductible net interest expense from £3m to £4m. A Limited would then be able to get tax relief for the full £4m interest paid in the period by amending its CT600 return to claim the additional deduction.
Remember, A Limited would have no control over these final steps as it would be at HMRC’s discretion whether it appointed the company as a reporting company and this could be done at any time up until 31 March 2021.
For help and advice on CIR reporting please contact Anton Hume or Andrew Stewart.
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