Corporate Interest Restriction: An In-Depth Overview of Limitations on Corporate Interests
Chris Danes · December 5th 2022 · read
Corporate Interest Restriction limits the amount of tax relief a company or Group can get for deducting net interest and other financing costs.
The below overview is based on information currently available in November 2022.
Which businesses are affected?
The Corporate Interest Restriction (“CIR”) applies to group and singleton companies subject to UK corporation tax, that wish to claim a deduction for interest expenditure incurred in the UK.
What are the Corporate Interest Restriction (CIR) rules?
The CIR rules operate by restricting the amount of tax relief available to a UK group on its net interest and financing costs where these are, broadly, more than £2 million in a 12-month period.
The restriction can be calculated by reference to either a ‘fixed ratio’ or ‘group ratio’ method. The calculations are complex and, require information on the wider consolidated global group. They can be broadly summarised as:
The default fixed ratio calculation gives an interest allowance equal to the lower of:
- 30% of the UK group’s ‘tax-EBITDA’ – taxable profits before interest, tax, capital allowances and other tax adjustments; and
- The worldwide group net interest expense, subject to certain adjustments (the ‘debt cap’).
- The group can instead elect to use the group ratio calculation, which gives an interest allowance equal to the lower of:
- The ratio based on the group’s net worldwide third-party interest expenditure as a percentage of the group’s EBITDA applied to the UK tax EBITDA; and
- The group’s net worldwide third-party interest expense.
If both CIR calculation methods result in a restriction, the company or group must appoint a reporting company within 12 months of the end of the period, file a CIR return, and allocate the restricted interest between the UK companies in the group (limited to each company’s net tax interest expenditure). Restricted interest can be carried forward as a company attribute indefinitely and reactivated in any subsequent year where there is sufficient excess interest capacity. Any excess debt cap can be carried forward to the next period.
Even where there is no interest restriction in a period, it may still be beneficial for a group to appoint a reporting company and file an abbreviated or full CIR return voluntarily, to protect any excess interest allowance, which can be carried forward for up to 5 years. This may mitigate future interest restrictions, which can reduce future tax liabilities in the event a group changes its future debt profile.
Reasons behind the introduction of the CIR rules
The CIR rules were introduced with effect from 1 April 2017, as part of the initial series of OECD BEPS measures designed to prevent the shifting of profits from the UK to low tax territories using connected party financing arrangements.
The CIR rules are complex and can result in:
- Unexpected corporation tax liabilities (even for loss making groups and companies).
- Penalties and reputational damage with HMRC can arise if CT returns and CIR returns are incorrectly filed or omitted.
- Failure to file CIR returns can lead to missed opportunities to claim relevant reliefs or reactivate previously restricted interest or unused debt cap.
How can MHA help you?
- The key aspects of how to be compliant with the CIR rules and manage the related risks are:
- Initiate: A detailed conversation with your tax adviser to discuss a coordinated and efficient approach to CIR (the earlier this process is started the better!).
- Immediately: Agree the plan of action regarding CIR to ensure statutory deadlines are met.
- Identify: A robust process for identifying the relevant group and company figures and the information to be reported
- Implement: The right tax technology solution to efficiently calculate and report any restrictions / claim any reliefs or excess interest capacity.
For more information on CIR, or to discuss other corporation tax matters, please get in touch or speak using our online enquiry form
Alternatively, you can email Chris Danes or Jonathan Dowding from our Corporate Tax team, who will be happy to assist: