Corporate interest restriction on late paid interest
12 February 2020
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The late paid interest rules (unhelpfully) apply before the CIR and in certain cases where interest is not paid within 12 months of the period end can delay any deduction to the period when interest is paid. Their interaction with two aspects of the corporate interest restriction will potentially cause difficulty for groups with accrued but unpaid interest that falls within the late paid interest rules:
- High interest deductions in a year, eg if interest from several periods is paid* at once, will be more likely to exceed 30% of tax-EBITDA
- The cap at the group’s interest per accounts could cause a restriction on late paid interest if all of the group’s interest is otherwise tax deductible in the UK.
* Payment for these purposes includes interest that is cash paid or satisfied through the issue of payment in kind notes / funding bonds
Carrying forward the allowance
The carry-forward rules for interest allowances prevent this being an outright injustice. If an amount of late paid interest from year one would have been covered by the interest allowance (had it been paid in that year) then that surplus allowance will be carried forward to use in the year when the interest expense ultimately crystallises. In this way, the total interest allowance over the period will be the same and the total amount of deductions under that allowance can be the same. However, the carry forward allowance can only assist for up to five years and will not help in respect of any interest arising before the CIR rules took effect in April 2017.
Impact of the £2m de minimis
For smaller groups, a more significant point is that the de minimis amount is only taken into account for the interest capacity and not the interest allowance: this means that no surplus of the £2m annual amount able to be carried forward. Where a group that has annual interest expense below £2m and considers itself to be ‘safe’, it could find an unpleasant surprise if late paid interest causes the de minimis to be exceeded in a specific period.
For all private equity backed groups in particular great care needs to be taken on exit. If the entire group is acquired, the original CIR group ends at that time – which causes the relevant period to end. If late paid interest is ultimately paid after the acquisition, the expense should be allocated to the new group’s CIR calculation. This separates the amount from any brought forward interest allowances, which would be extinguished with the old CIR group.
Whether the interest crystallises before or after the sale of the group, the length of the period will affect the de minimis. A short period can come down to days or weeks (usually for amounts before sale) or a long period could give a higher de minimis up to £3m (not that a long period cannot exceed 18 months for CIR purposes).
Corporate interest restriction – how it works in the UK