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Relaxation of reporting company deadline
As we have highlighted previously, there are a number of reasons why a group may wish to file a Corporate Interest Restriction (CIR) return. However, while the deadline for a CIR return is 12 months from the period end, it can only be filed once a reporting company has been appointed, which currently has a much shorter six-month deadline. This could be particularly troublesome for businesses where a change in the group structure during the year causes a group to cease during a year: the deadline for appointment could fall during the accounting year or otherwise before tax provisioning work commences, increasing the risk that something is missed.
The change introduced in the Finance Bill will increase the six-month deadline for appointing a reporting company to a more reasonable 12-month term. This change will apply to appointments (and revocations) made after Royal Assent to Finance Act 2018-19 (expected in spring 2019).
An adjustment also follows to the deadline for filing the CIR return so that this is not extended to three months after the group itself (rather than HMRC) appoints a reporting company. It seems unlikely that group companies would maliciously surprise another group member by nominating it as reporting company late in the window, so this aspect should not cause widespread concern.
Preservation of carry forward amounts on imposition of a new holding company by share-for-share exchange
Where the ultimate parent of a group becomes a subsidiary of another company, this will cause the original group to cease to exist for the purposes of the CIR. An impact of this is that any carry forward interest allowances available in the original group or excess debt cap carry forward amounts will be lost.
From 29 October 2018 onwards, this treatment will be relaxed for a limited class of transactions where a new holding company is inserted between an existing parent company and its shareholders. This change will not affect the loss of allowances etc for other scenarios such as management buy-outs or corporate acquisitions.
IFRS 16 leasing
The CIR takes into account the financing expense on finance leases as if it was interest, giving a potentially significant impact of the new accounting rules for those companies and groups affected by them. The approach taken will be to cause companies with ‘right to use’ leases (ie ‘on balance sheet’ items) to assess whether these would have been classified as finance leases or operating leases, with only the finance lease element brought in.
This provides consistency with the current rules and for companies operating on other accounting standards, such as FRS 102. There could be a slight benefit to the new treatment as certain leases, such as for small value items, may have been treated as finance leases but will not fall into the ‘on balance sheet’ category under IFRS 16.
The drawback of the treatment, like much with the CIR, is complexity as this reclassification will be required on the group’s consolidated accounts (where prepared under IFRS or a similar standard incorporating the new lease treatment). If UK companies form only a small part of a large international group, this may be seen as an onerous requirement.
In the current CIR rules, a significant adjustment to a group’s accounts interest expense is to remove adjusted capitalised interest amounts, recognising them in the period in which they are incurred – unless the group chooses to make the, irrevocable, Interest Allowance (Alternative Calculation) election.
Where a group had incurred loan arrangement or other deal costs that have been capitalised and amortised over the life of the facility, this adjustment has a significant impact. It required the group to make an election to prevent the deal cost amortisation being adjusted in the accounts interest figure (and hence in the application of the debt cap test), despite tax treatment following accounts treatment for this type of expense.
The proposed amendment will remove the adjustment where the expense is capitalised in respect of a financial asset, in particular, preventing capitalised deal fees from being caught. HMRC’s guidance covering the capitalised interest adjustment referred only to examples, such as interest capitalised into stock for property developers, that will still require adjustment; it is probable that this treatment was always intended but was overlooked due to the distinct treatment of financial assets such as loans in other areas of legislation.
The change is due to take effect only for periods commencing after 1 January 2019, leaving groups still exposed in the meantime. Therefore, groups may continue to make irrevocable elections to address the issue. Conversely, any groups incurring fees between 1 April 2017 and 1 January 2019 that have not made the election could find they take the relevant costs into account twice – both when incurred and then when amortising.
Where groups have made an Interest Allowance (Alternative Calculation) election before 29 October 2018, it will be possible for them to revoke that election for the purposes of periods starting on or after 7 November 2018 if the revocation is made within three months of the Finance Bill receiving Royal Assent.
This revocation may be of use to groups that had been affected by the treatment of capitalised deal costs. However, the current drafting leaves a category of companies (including those with December year-ends) where this election may be beneficial for one period before becoming unnecessary from 2019 but will remain irrevocable.
Extension of Interest Allowance (Alternative Calculation) election
The Interest Allowance (Alternative Calculation) election more closely aligns tax and accounting treatment for the CIR, allowing results to better follow expectations at the potential cost of additional administration. Given, as noted above, many groups may need to make this election to avoid undesired adjustment for deal cost amortisation; any extension could be seen as unwelcome.
However, the adjustments made have limited scope, adjusting for employee remuneration remaining unpaid after nine months following the period. This only affects the calculation of Group EBITDA and hence will only have an impact on groups intending to use the Group Ratio.
Intangible asset capitalised interest
The intangible fixed asset regime has inbuilt priority over other legislation, which could have prevented interest capitalised into the base cost of an intangible asset and then subsequently released from being treated as tax-interest (or income).
This result is to be prevented for periods commencing on or after 1 January 2019 with by amendment to ensure such amounts are still regarded as tax-interest for the purposes of the CIR. Therefore, for earlier periods, it is acceptable to exclude such amounts from tax-interest expense.
Wider capitalised interest
Amendments have also been made so that, for periods commencing on or after 1 January 2019, interest capitalised into the carrying value of qualifying assets (such as investment property, intangible fixed assets and plant, property and equipment) will be included in adjusted net group interest expense (affecting the debt cap and group ratio calculations).
Groups with releases of capitalised interest in respect of such assets (other than intangible assets where, as noted above, amounts also fall outside tax-interest) may still find their debt cap and group ratio calculations adversely affected for earlier periods.
Expansion of reporting requirements
The Finance Bill gives HMRC the ability to expand the CIR reporting requirements for returns filed from 1 January 2019, to include any ‘reasonably required’ information that it specifies in a notice. This will make it important to check current HMRC guidance, which will become binding in this respect, before filing - rather than being able to rely on the legislative provisions alone.
There are a number of other changes made that are less likely to be widely applicable or, in some cases, simply less noticeable. These include:
- Accounts interest - aligning the treatment of some intragroup releases with tax, only with an impact where the accounting and relevant tax groupings are distinct (for periods commencing on or after 1 January 2019)
- Non-consolidated investments – some clarification to how group interest amounts are adjusted where this election is made
- Public infrastructure – ensuring certain assets such as deferred tax are treated as qualifying assets (we had interpreted the existing rules in this way where there was a clear link with the infrastructure trade) and to carve out certain expense reimbursements from the ‘highly predictable’ element of the tests for grandfathered related party interest – these changes are all fully retrospective
- REITs – several changes clarify the way in which calculations are undertaken and the adjustment applied where interest cover falls below 1.25 times (s543 CTA 2010) is to be included as tax-interest income (with retrospective effect).
Corporate interest restriction – how it works in the UK
For help and advice on the corporate interest restriction, please contact Anton Hume or Andrew Stewart.
Read more on the Finance Bill 2018-19