Following the recommendations of the OECD’s ‘Base Erosion and Profit Shifting’ project on interest expense (Action 4), from 1 April 2017 the UK introduced legislation to limit corporation tax deductions for interest paid – the Corporate Interest Restriction (CIR) rules.
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CIR on late paid interest
Public benefit exemption from CIR
Reporting your corporate interest restriction
Tax elections possible under the CIR rules
Changes to the CIR from Budget 2018
CIR – the basic rules
The rules is structured to restrict UK interest deductions for the higher of:
- De minimis: £2m net interest
- Fixed Ratio: 30% of ‘tax-EBITDA’
- Group Ratio: Group’s ratio of interest to EBITDA
Interest under the Fixed Ratio and Group Ratio tests will be limited to the overall interest of the ‘group’. The rule applies to a ‘group’ (based on the requirement to prepare consolidated accounts) headed by a corporate entity in the same way as the existing Worldwide Debt Cap.
UK tax-adjusted figures aree aggregated before applying the tests (ie there is a single £2m de minimis per group), before allocating any disallowance to companies. The flow-chart below illustrates how these measures will apply.
Identifying the group
The CIR operates on a group basis, with tax figures aggregated from all UK members of the group, and consolidated accounts figures required for calculations. Therefore, it is vital to know which companies comprise the group for CIR purposes.
For CIR purposes, a group is defined as an ultimate parent company and all of its subsidiaries apart from those that would be excluded from consolidation under the fair value accounting rules in IFRS 10 for investment entities. There are situations where it can be difficult to identify members of a group and the existence or absence of consolidated group accounts is not always conclusive as far as the CIR rules are concerned.
How the CIR interacts with other rules
The CIR rule applies after other tax adjustments. The starting position for calculating tax-EBITDA is a company’s Profit Chargeable to Corporation Tax after almost all tax adjustments – the main exception being R&D relief. Interest, capital allowances and intangible fixed asset allowances are added back.
The net interest expense figure is net of interest income and calculated after other rules such as transfer pricing (including thin capitalisation), and the unallowable purpose and anti-hybrid rules. Having an Advance Thin Capitalisation Agreement (‘ATCA’) is still, therefore, relevant to many groups.
What BDO can do for you
As well as helping you with CIR calculations and returns, we can help investigate changes to your group’s financing structure to identify options to mitigate the impact of significant restrictions.
Going forward, analysis of this restriction will need to be included in relation to M&A activity, restructurings and refinancing, changes in group profitability and expansion overseas, as well as for annual compliance.
While the new restriction will be applied after transfer pricing, it will be relevant in determining the level of potential exposure from transfer pricing. Whether to engage in detailed analysis of borrowing capacity and debt pricing may be flavoured by whether, and how significantly, the new rule would restrict interest deductions.
We can help you establish an arm’s length level of related party debt (and capacity for debt) and interest for the purpose of any planning and to support a tax filing position or ATCA application.
For help and advice on the CIR please get in touch with your usual BDO contact or [email protected].