Corporate interest restriction - how it works

16 July 2020

The UK has introduced legislation to limit corporation tax deductions for interest paid – the Corporate Interest Restriction (CIR) rules. 

Understanding how and when the CIR rules apply to your group and what their impact may be can be complicated. You can check your status using our CIR healthcheck.


Below you will find links to most of the information you will need to understand and manage your responsibilities under CIR rules.

Public benefit exemption from CIR
Reporting your corporate interest restriction
Tax elections possible under the CIR rules
Changes to the CIR from Budget 2018
Non-resident company landlords - the changes from 6 April 2020

Practical lessons learned

The Corporate Interest Restriction (CIR) has been in force since April 2018. Based on our own experiences and those of advisers contacting our Tax Support for Professionals line, we are publishing a series of CIR lessons on key topics: 

CIR on late paid interest
Group identification
Calculation complexities and the group ratio        
Property development        
Infrastructure rules

What is Corporate Interest Restriction? The basic rules

The rules are 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 are 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. Tax figures are aggregated from all UK members of the group, and consolidated accounts figures are 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 does the CIR interact 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 corporate interest restriction calculations and CIR returns to HMRC, we can help assess your group’s financing structure and financing costs in order to mitigate the impact of significant restrictions.

Analysis of this restriction will need to be considered in relation to Merger & Acquisition 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 [email protected]. or your usual BDO contact.