CIR lessons – group identification

03 August 2020

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The Corporate Interest Restriction (CIR) rules operate on a group basis, with tax figures aggregated from all UK members of the group, and consolidated accounts figures required for calculations. It is, therefore, vital to know what the group comprises of and to access the consolidated accounts. While sounding a simple concept, there can be many difficulties in the identification process.

The group is defined as an ultimate parent company and all of its subsidiaries, excluding any subsidiaries that would be excluded from consolidation under the fair value accounting rules in IFRS 10 for investment entities. Many people considering what a ‘group’ is for the CIR will not already be familiar with the details of IFRS 10, giving a risk that important points are lost in jargon.

IFRS 10 – Investment entities

A rule of thumb is to start assuming this set of accounting rules does not apply unless it can be shown otherwise – companies reporting on a fair value basis are more likely to have considered the points in detail at some stage.

Broadly speaking, the purpose of the investment entity accounting rules is to allow funds to report to their investors on a practical basis that makes sense in the circumstances, ie showing what the value of investments is, rather than amalgamating underlying trading results in an impractical way.

We summarise below the key tests, which include indicators rather than solely hard and fast rules. If in doubt (and likely to cause a material difference in the CIR calculations) accounts technical specialists should be consulted for form a view.

  • Multiple investors – An investment entity will generally serve multiple investors (which can be investing through a feeder vehicle) that will usually not be related parties of the entity
  • Multiple investments – An investment entity will generally have more than one investment
  • Investment purpose – An investment entity must have a purpose of investing for capital gain and or income for its investors
  • Fair value reporting – The entity should in practice report the fair value of its investments to its investors.

In many cases, this is a clear answer – for instance where the top company in a group prepares fully consolidated accounts.

It is important to remember that a lack of consolidated accounts doesn’t stop a company heading a multi-company group for under the CIR rules. Consolidation might not be undertaken for a range of reasons, such as the small size of the group or simply that it is not required under local GAAP. The investment entity exemption under IFRS 10 is the only exclusion relevant and, in the grand scheme of things, is not overly common. A prudent starting point is to assume all subsidiaries will be part of the same group.

Larger structures

In some difficult situations, a UK company may be part of a much larger group or disparate investment structure, such as a sovereign wealth fund, without visibility of the full picture. The UK financial and/or tax team will know the immediate structure and the entities they trade with, but might never previously had need to know about all sister companies or the accounting policies applied by the company’s parents.

There is, alas, no magic bullet for resolving this matter in these cases. The UK company will be reliant on those further up the chain understanding the rules and sharing knowledge. To this end, it is important to engage in discussions early in the process and to be prepared to carefully explain what you need to know and give guidance on the meaning of terms, for instance the importance of the debt cap and key criteria for fair value accounting under IFRS 10 (see IFRS 10 box).

If support is not forthcoming for any reason, there are limited routes the UK company can take to resolve the matter. For instance the ultimate owner of the company should be identifiable – with anti-money laundering rules making this essential for advisers to know as well - which could allow other companies with the same ultimate owners to be sought from company information databases. Any other UK companies identified could be contacted to ask their view but this will not give a full answer.

Ultimately it may be necessary to estimate what the group consists of and provide a clear disclosure.

Accounting for unconsolidated groups

In cases where there is a CIR group but the ultimate parent does not actually prepare consolidated accounts, it will be necessary to assess the relevant figures for the CIR as if those accounts had been prepared.

This is, fortunately, generally less daunting than drawing up a full set of consolidated accounts. If using the fixed ratio then the only information drawn from the accounts is the Adjusted Net Group Interest Expense (‘ANGIE’) to be used in the debt cap calculation. As such, this is the only absolutely necessary figure.

Preparing a consolidated ANGIE figure is as simple as aggregating the net interest (albeit taking into account the various adjustments required) for each entity in the group. This can be simple if adding on only one or two parent companies.

In complex cases, it might be possible to show that while we do not know the exact ANGIE figure, it is certainly much larger than the interest allowance and this should be seen as ‘good enough’, with acknowledgement that the use of estimated figures may not be required in such cases.

Tests for the group ratio are, of course, more complex; with more accurate consolidation required to identify related party interest expenses and Group EBITDA. If these figures cannot be calculated, the UK group should not use the group ratio in its CIR calculations.

Take care with changes

Having understood what the group is, it is important to be aware for when it changes.

If the ultimate parent company to a group is acquired by another company, this will generally cause the first CIR group to cease at that date and the companies to now fall into another group.

Results from UK companies in the first group will need to be split between several CIR groups and periods (unless the acquisition was at the year-end).

Reporting deadlines give a nasty sting in the tail for acquisitions before 28 October 2018 as the 12 month clock starts from that day, potentially giving an obligation to file a return before groups undertake their tax compliance processes.

The return filing deadline has been thankfully extended for acquisitions from 29 October onwards with reports only due the later of 12 months from the end of the period (ie the acquisition) and 24 months from the start of the period.

Given the harshness of the deadline for pre-28 October acquisitions, HMRC has indicated that, at least in some cases, it will take a lenient view and not enforce the penalty of £500 to £1,000 that would usually arise from filing a return late.


Corporate interest restriction - how it works