Taxpayers that do not currently exceed the £2 million limit but expect to do so in the future should also consider the rules, as there may be an opportunity to ‘bank’ interest allowance for use in future periods.
Under corporation tax self-assessment, the taxpayer must ensure that the CIR rules have been considered when submitting its tax return. Where required, a CIR return must also be filed with HMRC in addition to the company’s tax return.
The mechanics of the rules and the calculation are complex.
How we can help?
We help businesses to understand and comply with the CIR rules.
Some of the areas we can help with are:
- Identifying the worldwide group for the purposes of the CIR rules
- The nomination of a reporting company
- Submitting CIR returns to HMRC
- Helping to prepare the CIR calculations, including consideration of the elections available
- Incorporating any CIR restrictions into tax returns
- Undertaking analyses for proposed structures, projects and transactions
Frequently asked questions about Corporate Interest Restriction (CIR)
What are the UK CIR rules?
The CIR rules apply to all companies within the charge to UK corporation tax and restrict the amount of deductible interest and other allowable financing costs in some situations.
A potential restriction occurs where the tax-interest expense for each year exceeds £2 million. This limit is shared between companies in the same worldwide group. ‘Worldwide group’ has the usual meaning for the purposes of accounting consolidation; so, wherever two companies share a common ultimate parent their aggregate tax-interest expense should be considered. ‘Tax-interest expense’ has a similar but not identical meaning to accounting interest expense.
Taxpayers that do not currently exceed the £2 million limit but that expect they might do so in the future should also consider the rules, as there may be an opportunity to ‘bank’ interest allowance for relief in future periods.
The mechanics of the rules and the calculation are complex. There are several elections available that need to be considered to reach the most favourable outcome. For example, use of the fixed ratio method versus the group ratio method will often be the first key decision. Even where no specific elections are made, concepts such as the modified debt cap need to be considered.
When do we need to submit a Corporate Interest Restriction (CIR) return?
A return is only required where a ‘reporting company’ has been appointed (see ‘How do we submit a Corporate Interest Restriction (CIR) return?’). This can happen if either the company, the group or HMRC appoints one.
A company or group must appoint a reporting company if it will be subject to an interest restriction under the rules or if it wishes to submit a CIR return. If HMRC appoints a reporting company, the group will be notified in writing.
Although a potential restriction only occurs in a period where the tax-interest expense exceeds the £2 million limit, taxpayers who anticipate potentially exceeding this in future may also be advised to submit returns. This is because submission of a return allows a group to ‘bank’ any allowance arising in one period, in order to be able to use this to reduce future restrictions.
Where companies form part of the same ‘worldwide group’, this single minimum threshold is shared by all group companies. ‘Worldwide group’ has the usual meaning for the purposes of accounting consolidation; so, wherever two companies share a common ultimate parent their aggregate interest expense should be considered. Note that where there is more than one group member chargeable to UK corporation tax, only one company is required to submit a return, on behalf of the entire group. This is the ‘reporting company’.
In some cases, HMRC will appoint a reporting company itself. Where notification is received that it has done so, submission of an interest restriction return is required. (See ‘How do we submit a Corporate Interest Restriction (CIR) return?’ for more information on the meaning of ‘reporting company’ and the submission process).
Where there is a requirement to file a CIR return, the deadline is the later of 12 months from the end of the period of account of the worldwide group and, where the reporting company was appointed by HMRC, three months after the date on which the reporting company was appointed.
How do we submit a Corporate Interest Restriction (CIR) return?
A worldwide group should first appoint a ‘reporting company’ to prepare and submit its CIR return to HMRC. The reporting company must not be dormant and must itself be subject to UK corporation tax for at least part of the period covered by the return. The initial appointment should be notified to HMRC within 12 months of the end of the specified period of account. This will be valid for both the specified and all subsequent periods of account, unless HMRC is notified of a new reporting company having been appointed.
There are two formats for the return: full or abbreviated. Where there is an interest restriction in the period, a full return is required. Where there is no restriction, an abbreviated return may be prepared instead, to reduce the compliance burden. A full return is, however, required where a group intends to use any excess capacity in a future period. See ‘What is the difference between an abbreviated and full Corporate Interest Restriction (CIR) return?’ for more details.
Where a return is filed, the deadline is the later of 12 months from the end of the period of account of the worldwide group and, where the reporting company was appointed by HMRC, three months after the date on which the reporting company was appointed. See ‘Can we amend a Corporate Interest Restriction (CIR) return?’ for more information on the amendment and resubmission process.
What is the difference between an abbreviated and full Corporate Interest Restriction (CIR) return?
A full corporate interest restriction return must contain details of all the relevant companies in the worldwide group. It should set out a statement of calculations to include details of the tax-interest and tax-EBITDA figures for all companies, any disallowance in the period and how this is to be allocated between group companies. It should also contain a statutory declaration and any elections made.
An abbreviated return is, as the name suggests, a shortened version of a full return. An abbreviated return can only be submitted where the group is not subject to any interest restriction for the period. The submission must still include details of all the relevant companies in the worldwide group along with a statutory declaration that there is no restriction in the period. No calculation is required.
A group that is not subject to an interest restriction is not obliged to appoint a reporting company or file a return, unless HMRC appoints a reporting company, in which case a return must be filed. The key incentive to file a return in such circumstances is that this allows the group to carry forward any unused interest allowance. This may then be used to reduce restrictions in later periods.
Once a return is filed for a period in which no restriction arises, a revised return may be submitted at any time up to 60 months after the end of the period to which the return relates. Filing an abbreviated return allows companies to access the interest allowance from periods up to five years prior, while reducing the immediate compliance burden of a full return.
We are happy to discuss the features of an abbreviated return in more detail and how we can help your group. Please do not hesitate to get in touch with our experts.
Can we amend a Corporate Interest Restriction (CIR) return?
The short answer is yes, subject to specific time limits. Where a restriction applies, revised interest restriction returns must be submitted by the later of 36 months from the end of the period of account and three months after the appointment of the reporting company. Within these time limits, there is no maximum number of revisions that can be submitted. Any new submission will simply be treated as superseding all prior submissions.
Where there is an amendment to the UK corporation tax return of an individual group member that impacts on the CIR return, the CIR return will need to be revised. In this case, the revised interest restriction return must be submitted within three months of receipt of the amended individual corporation tax return by HMRC.
An extended time limit applies where the worldwide group is not subject to an interest restriction in the period and an abbreviated return is submitted. A full interest restriction return may be submitted 60 months after the end of the relevant period of account. This extended time limit allows a group that is subject to restriction for the first time to resubmit previously filed abbreviated returns as full returns. This potentially enables the group to reduce restrictions through the use of brought forward allowances. See ‘What is the difference between an abbreviated and full Corporate Interest Restriction (CIR) return?’ for more details.
How does IFRS 16 impact Corporate Interest Restriction (CIR) returns?
Lessee accounting under IFRS 16 usually results in an interest expense being recognised in the profit and loss account, resulting in some interaction with the CIR rules.
For periods of account beginning on or after 1 January 2019, IFRS 16 removes the distinction between finance and operating leases and instead requires assets and liabilities from all but exempt lease agreements to be recognised on the balance sheet.
For CIR purposes, however, this distinction remains important. Interest expenses relating to leases that would previously have been classified as operating leases under IAS 17 are not restricted under CIR and will need to be removed from calculations. On the other hand, interest expenses relating to leases that would previously have been classified as finance leases will need to be factored into calculations and may be subject to restriction.
If interest is restricted under the Corporate Interest Restriction (CIR) rules, can it be deducted in later periods?
The short answer is ‘possibly’. Where a group has been subject to an interest restriction in the past, and in a later period of account its interest expense falls below the amount that would be allowable in that period, there is the possibility to reactivate previously disallowed amounts.
Reactivation is not automatic and is not always available. The rules are, however, designed to eliminate unfair permanent disallowances that could otherwise arise from short term situations or fluctuations.
The rules around reactivation are complex. We are happy to discuss how these may impact your business, so please don’t hesitate to get in touch.
What is the difference between the fixed and group ratio methods for the Corporate Interest Restriction (CIR) calculation?
The fixed ratio method is the default method, but an election may be made to apply the group ratio method instead. This election is made in the CIR return and is revocable, meaning that a group can decide from period to period whether it wishes to apply the fixed ratio or the group ratio method.
The fixed ratio method restricts UK interest deductions above the £2 million limit to the lower of:
- 30% of the ‘UK tax-EBITDA’
- a measure of the worldwide group’s net external finance expense (see ‘What is the modified debt cap for the Corporate Interest Restriction (CIR) calculation?’)
‘UK tax-EBITDA’ is a measure similar to accounting EBITDA, but with additional tax adjustments taken into account.
The group ratio is a more variable method that is based on the relevant profile of the entire worldwide group. Whether or not an election is advantageous will depend on the exact circumstances, but the broad intention of the rules is to stop UK resident companies from being unfairly penalised for high interest costs in situations where the entire worldwide group is similarly highly leveraged with external debt.
The rules are complex and significant work is often required to determine the best approach, but for groups with substantial interest costs the resulting tax benefits often far outweigh the costs. We are happy to discuss the implications for your business, please don’t hesitate to get in touch.
What is the modified debt cap for the Corporate Interest Restriction (CIR) calculation?
The modified debt cap has two forms: the fixed ratio debt cap or group ratio debt cap, depending on the calculation method chosen. The word ‘modified’ is used to distinguish the concept from the ‘debt cap’ under the old worldwide debt cap rules, which were repealed for accounting periods beginning on after 1 April 2017.
The fixed ratio debt cap is relevant where the fixed ratio method in used, and the group ratio debt cap is relevant under the group ratio method. The two measures are slightly different, but both place an absolute cap on the interest deduction available in the UK. This is in addition to the limit imposed by the relevant ratio of tax-EBITDA in each case. The starting point for the debt cap in both cases is the net accounting interest expense in the consolidated accounts of the ultimate parent of the worldwide group. A series of steps and adjustments are then made to reach either the fixed ratio debt cap or the group ratio debt cap. The broad aim of the debt cap is to ensure that amounts available for deduction in the UK are proportionate to the costs in, and position of, the overall worldwide accounting group. For example, a group with no external financing costs, but with large interest expense balances in the UK on intercompany loans with overseas group companies is likely to be subject to a debt cap restriction.
The adjustments referred to above can be complex. If you require any further information, please do not hesitate to get in touch with our experts.