For some, intragroup financing arrangements had long been thought of as an opportunity for multinational groups to reduce their tax bills by creating large interest deductions in high tax territories. This started to change when the Organisation for Economic Co-operation and Development (OECD) began its base erosion and profit shifting project. As a result of the OECD’s efforts, the UK introduced the corporate interest restriction (CIR) rules with effect from 1 April 2017 (Part 10, The Taxation (International and Other Provisions) Act 2010).

The CIR applies to group and single companies subject to UK corporation tax that wish to claim a deduction for interest expenditure incurred in the UK. This is regardless of whether the company has any overseas operations or related party debt. Tax relief is restricted where the total amount of interest payable exceeds the threshold.

Recent developments

Interest payments have risen as central banking rates have climbed sharply, and we expect more businesses to be affected by the CIR as a result. Furthermore, we’ve seen property investment companies that hitherto were unaware of the regime come into scope, on top of those who entered the regime following changes to the non-resident landlord regime in 2020.

HMRC operated what was considered to be a ‘soft landing’ on the CIR rules since their inception in 2017. However, recently HMRC has begun refusing to accept late group reporting company nominations and started to apply the administration side of the regime more strictly. This is having an impact on those businesses that do not have their CIR administration up to date. Following the announcement of HMRC’s hardening approach, CIR-related matters are also increasingly featuring as part of due diligence processes.

It is therefore a good time to review the potential application of the CIR to the company or group’s net interest expense position.

It should be noted that there are other provisions within the UK tax code that may affect or restrict the ability of a borrowing company to obtain corporation interest relief on interest expense. This article only covers the CIR aspects.

The restriction

The CIR rules operate by restricting the amount of tax relief available to a UK group on its net interest and financing costs to the ‘interest allowance’ for the period where the UK net interest expense is, broadly, more than £2m in a 12-month period. The calculations to ascertain a group’s interest allowance are complex and can require detailed information to be prepared on the worldwide consolidated group. For detailed guidance on calculating the restriction see ICAEW’s TAXguide 08/18: the CIR: a practical guide.

Impact of the restriction

The CIR rules must be applied by all groups that breach the £2m de minimis set out above. However, if groups wish to make a group ratio election, allocate interest disallowance to specific companies, and carry forward interest allowances, the group must appoint a reporting company within 12 months of the end of the period. This is in addition to filing an interest restriction return (IRR) and allocating any disallowed 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 is reactivated in the next year where there is sufficient excess interest capacity. Any excess debt cap or surplus interest allowance is a group attribute that can be carried forward provided the worldwide group remains the same.

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 IRR voluntarily, to protect any excess interest allowance, which can be carried forward, at group level, for up to five years. This may mitigate future interest restrictions, which can reduce future tax liabilities in the event a group changes its debt profile.

Companies can make a variety of elections, including the group ratio and public infrastructure exemption elections. However, there are strict dates around when these elections need to be made. In some cases, the election must be made within the accounting period that it relates to – meaning early advice is strongly recommended. Importantly, unless a reporting company has been nominated in time, no elections can be made. 

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 where corporation tax returns and IRRs are incorrectly filed or omitted; and

• missed opportunities to claim relevant reliefs, or reactivate previously restricted interest or unused interest allowance, where there is a failure to correctly nominate group reporting companies, or to file IRRs on time.

Therefore, it is important that the group:

• discusses the regime internally and with advisers to ensure it develops a coordinated and efficient approach to the CIR;

• agrees the plan of action regarding the CIR to ensure statutory deadlines are met;

• designs a robust process for identifying the relevant group and company figures and the information to be reported; and

• implements the right solution to efficiently calculate and report any restrictions / claim any reliefs or excess interest capacity.

Soft landing comes to an end

The CIR has now been in place for some seven years and you would have expected the regime to have largely bedded down in this time. However, that is not the case. This was made clear by two recent HMRC Agent Update issues. Issue 117 provides a list of common errors identified by HMRC and appears to be the first feedback provided by HMRC to taxpayers. Issue 109 clarifies when HMRC will appoint a reporting company, and essentially ended the ‘soft landing’ that HMRC had provided for the administrative burden of complying with the CIR. 

It is unfortunate that it appears that HMRC largely chose to ignore CIR compliance until last year. This meant that useful feedback that could have been given to taxpayers, with helpful clarifications made to the relevant sections of the HMRC manuals, was not provided, and many companies are finding that their CIR compliance is deficient in one way or another. This could have been avoided if HMRC had provided this feedback within the soft-landing period immediately after the first CIR filings were made in 2019. 

Belatedly, HMRC has recently updated its manuals to include guidance on the circumstances in which HMRC will and will not appoint a reporting company on behalf of a group. 

Is it time to review the £2m allowance?

In the authors’ experience, the £2m de-minimis allowance is also becoming problematic. This threshold was set at a time where we had become used to a low-interest economy with Bank of England rates (BOE) then at a record low of 0.25%. Today it is 5%, some 20 times higher. Nor has the de-minimis been adjusted for inflation, a calculation that would likely have taken the £2m allowance to c.£2.6m using BOE inflationary rates.

The stagnation of the £2m de-minimis at a time where interest rates have spiked will no doubt be dragging a much larger population of corporate groups into the CIR net. CIR compliance is not straightforward and there is a considerable cost to it, often without any material change in a company’s tax position. It may be that a different approach will free some companies from the burden of complying with the CIR rules without having a significant negative effect on tax receipts.

Other issues

The procedural inconsistencies between the CIR reporting regime (particularly around deadline dates and reporting processes) and the standard deadlines for corporation tax self assessment (CTSA), are also deeply unhelpful and the policy rationale for those differences is very much unclear. These inconsistencies make CIR compliance unnecessarily complicated and create dead costs that are then passed onto businesses in one way, shape or form. 

The authors would also welcome HMRC proactively policing areas of new legislation and then provide useful feedback to taxpayers and agents much sooner, rather than just come down hard on taxpayers who are trying to do their best with new areas of complex legislation. CIR is not the only area where an initial lack of HMRC focus has been followed by a ‘crack-down’ that would not have been necessary, had HMRC’s compliance activity been proactively set at the right level from the outset. 

Concluding comments

In the authors’ view, HM Treasury urgently needs to look at the £2m CIR de-minimis and simplify the CIR reporting requirements so that they sit alongside the normal CTSA process with the deadlines for elections aligned. Guidance provided in agent feedback sessions also needs to find its way into updated and more useful HMRC manuals guidance. Otherwise, we will continue to see an increasing number of businesses that struggle to grapple with CIR for the first time both technically and from a compliance cost perspective.

Stuart Rogers, Corporate Tax Partner, and Rhiannon Baynham, Senior Tax Manager, PKF Francis Clark