View the related Tax Guidance about Corporate interest restriction (CIR)
Corporate debt ― overview
Corporate debt ― overviewThis guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. Relief is only available where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes. See the What is a loan relationship? guidance note.A loan relationship exists where a company stands in the position of debtor or creditor in respect of a money debt that arises from a transaction for the lending of money. Although, it
Group relief for carried-forward losses
Group relief for carried-forward lossesThis guidance note examines in detail the relief available to groups for carried-forward losses. The scope excludes the treatment of specialist businesses such as banks, insurance companies and oil and gas companies.From 1 April 2017, companies can surrender certain types of carried-forward losses to another company in the same group relief group. The rules are subject to several conditions and numerous anti-avoidance provisions, which are discussed below.Prior to 1 April 2017, it was not possible to surrender brought forward losses of any description against profits of any other companies within the group relief group. This meant that certain types of losses could be ‘trapped’ within individual legal entities with little or no prospect of relief, particularly in cases where the company was not expected to make profits in the future against which the losses could be relieved.Development of the UK legislationThe legislation was introduced by F(No 2)A 2017, Sch 4, para 23 and applies generally from 1 April 2017. For the anti-avoidance rules, see below.Draft guidance on the loss relief commencement provisions was issued by HMRC on 7 December 2017.More detailed HMRC guidance on group relief for carried forward losses can be found at CTM82000 onwards.Accounting periods straddling 1 April 2017Where a company’s accounting period straddles 1 April 2017, the periods before and after 1 April 2017 are treated as two separate accounting periods. Profits / losses are time apportioned or, where that would produce an unreasonable result, apportioned on a just and reasonable basis.
IFRS 16 leases ― the tax implications
IFRS 16 leases ― the tax implicationsOverview of IFRS 16International Financial Reporting Standard 16 (IFRS 16) came into force for accounting periods beginning on or after 1 January 2019, replacing International Accounting Standard 17 (IAS 17). The adoption of IFRS 16 applies to all entities which apply International Financial Reporting Standards or Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). Entities applying FRS 102 are excluded from the changes.Prior to IFRS 16, lessees and lessors were required to make a distinction between finance and operating leases. Where the lessee had substantially all the risks and rewards incidental to the ownership of an asset, it had to recognise a finance lease asset and liability on its balance sheet. Where the lessee did not have substantially all the risks and rewards incidental to the ownership of the asset, it recognised lease payments as an expense over the lease term and was considered to have an operating lease. This treatment will continue under FRS 102. However, IFRS 16 removes the distinction between finance leases and operating leases for a lessee. Under IFRS 16, a lessee will recognise all leases, subject to some limited exceptions for short-term leases or those of low value (see below), on its balance sheet leading to a ‘right-of-use’ (ROU) asset and a lease liability for all leases. The treatment for lessors under IFRS 16 is broadly unchanged.For tax purposes, changes in accounting standards for leases would normally have been ignored as a result of the provisions in
Corporate interest restriction ― overview
Corporate interest restriction ― overviewThe corporate interest restriction (CIR) essentially limits the amount of interest expense a company can deduct from its taxable profits if the UK aggregate net interest expense of the worldwide group to which it belongs is over £2 million. The actual mechanics of the CIR calculation are highly complex (the legislation is over 150 pages long) and are detailed below. Before looking at the detail of the rules, it is important to note that there are a few points that are specific to the CIR regime, as follows:•the rules operate in relation to the worldwide group and by reference to the period of account (PoA) of the group for which the consolidated financial statements are prepared. A worldwide group usually refers to an ultimate parent and each of its consolidated subsidiaries, although it is possible to have a single-company worldwide group•the CIR works on a group rather than a company-by-company basis which is different to most taxing provisions. What this means is that most calculations required by the rules are carried out at the group level with any interest restrictions etc being made afterwards to individual companiesThe CIR applies to ‘tax interest expense’. This is the legislative phrase used to encompass a wide range of interest and interest-like transactions such as:•most loan relationship debits•some derivative contract debits•the finance cost element of certain arrangements or transactions involving finance leasing, debt factoring or service concession arrangementsTIOPA 2010, s 382For simplicity, when the
Corporate interest restriction ― fixed ratio method
Corporate interest restriction ― fixed ratio methodThe fixed ratio method is the default method of limiting the deduction available under the corporate interest restriction (CIR) rules. For a general overview of the regime, see the Corporate interest restriction ― overview guidance note. The fixed ratio method restricts the deductibility of interest based on the lower of two figures. These are:•a proportion (30%) of the aggregate tax-EBITDA of the companies in the CIR worldwide group which are subject to UK corporation tax, and•the fixed ratio debt cap, which is generally the adjusted net group interest expense (ANGIE)An alternative method for calculating the restriction, known as the group ratio method, is available by election only. See the Corporate interest restriction ― group ratio method guidance note for details.The fixed ratio method is so-called as it uses a fixed ratio (30%) of tax-EBITDA. The fixed ratio debt cap looks at the external net group interest expense (sometimes referred to by the acronym NGIE) of the worldwide group based on the consolidated P&L. This is then subject to a series of further complicated adjustments to align the result more closely with UK tax principles, the result of which is the adjusted net group-interest expense (ANGIE). If a group has more external debt in the UK than in the worldwide group overall, then ANGIE may produce a lower cap than the fixed ratio of tax-EBITDA. The key steps in calculating the fixed ratio restrictionThe fixed ratio process involves a number of detailed
Derivative contracts
Derivative contractsA derivative contract is a financial instrument, or security, whose price is dependent on, or derived from, one or more underlying assets or indices. It is simply a contract between two or more parties whose value is determined by fluctuations in the underlying asset or index.The taxation of derivative contracts tends to make tax practitioners nervous unless they are experienced in the financial markets. However, the tax rules governing the basic derivative contracts used in day-to-day treasury transactions (eg forward currency contracts and interest rate swaps) are relatively straightforward. Many companies will have these types of basic derivative contracts without realising they fall within the derivatives rules, so it is worth discussing specific types of arrangement rather than derivatives generally when initially advising on derivatives.This guidance note steers readers through the rules and provides an overview of the main provisions and their practical application. It includes comments on the main definitions, the basis of taxation and the core anti-avoidance rules.The rules governing the taxation of derivative contracts generally follow the same principles as the loan relationship regime. It is an accounts based income regime, ie unless there is an express provision to the contrary, the amounts recognised in the statutory accounts of the company are taxed as income rather than capital. The starting point for tax purposes for a derivative contract is to bring into account the credits or debits recognised in the P&L for the period in question in accordance with generally accepted accounting practice (GAAP). This
Corporate interest restriction ― carry-forward amounts
Corporate interest restriction ― carry-forward amountsWhat can be carried forward under the CIR rules?Companies may experience variations in business profits and market interest rates. Changes in capital structure that impact the level of debt on the balance sheet may also occur from time to time. These and other sources of volatility could result in interest disallowances in some periods and unused interest allowances in other periods.To provide a greater element of fairness in the corporate interest restriction (CIR) rules, there are a number of carry-forward provisions:Tax attributeOwnershipCarry-forward periodStatutory referenceTax-interest disallowedCompanyIndefinite carry forwardTIOPA 2010, s 378Unused interest allowanceWorldwide groupFive yearsTIOPA 2010, ss 392–395AExcess debt capWorldwide groupNext period of account (PoA)TIOPA 2010, ss 400(3)–(7), 400AAs detailed in the table above, the tax attributes can belong to either the group as a whole or to an individual company. This distinction in ownership of these attributes is important.Where the tax attribute belongs to the worldwide group, then any change to the ultimate parent will result in the loss of those tax attributes at that point, other than where, for reorganisations, a new holding company is inserted between an existing ultimate parent company and its shareholders. (Where the group retains the same ultimate parent following a transaction, other changes to the composition of the group are ignored, ie the worldwide group is treated as the same group.) This applies in the case of all attributes except tax-interest disallowance, which belongs to the individual
Corporate interest restriction ― frequently asked questions
Corporate interest restriction ― frequently asked questionsThe following scenarios are intended to illustrate how the corporate interest restriction (CIR) will apply in a variety of real-world situations. The scenarios are intended to be more complex than the most simple situations but not uncommon.For a general overview of the regime, see the Corporate interest restriction ― overview guidance note.How does the CIR apply if a company’s accounting periods (APs) do not align with the period of account (PoA)?Most of the computations and allocations required by the CIR are carried out by reference to a group’s PoA. UK corporation tax, however, operates by reference to APs of individual companies, which do not necessarily align with the periods for which a group draws up consolidated financial statements. The term used to describe an AP of any group company that falls wholly or partly within a given PoA is a relevant AP. Where a UK group company’s APs exactly align with the periods for which its group draws up financial statements, that company will have only one relevant AP and it will be relatively straightforward to derive the necessary amounts from the company’s tax computations to carry out the group level CIR calculations.Where a UK group company’s APs do not exactly align with the group’s PoA, that company may have more than one relevant AP relating to a given PoA. Where this is the case, each relevant AP will be within the scope of the CIR calculations. However, certain apportionment calculations need to
Deduction of interest against property income ― corporation tax rules
Deduction of interest against property income ― corporation tax rulesTax relief for interest on property acquisitions ― overviewOften, the acquisition of a property by property developers or property investors will be financed by a loan (or other form of debt). The buyer will wish to obtain any available tax deductions for the financing costs.For companies, financing costs such as interest payments fall under the loan relationship rules. There is, then, a distinction between trading and non-trading loan relationships. As the names suggest, generally speaking, a trading loan relationship will arise where a borrower has entered into the relationship to provide funding for its trade; otherwise, the relationship will be a non-trading loan relationship. For more information on loan relationships, see the What is a loan relationship? guidance note.For a property developer, finance will normally be required to some degree for a property acquisition and / or the development work itself. In this situation, the loan interest will be regarded as a trading loan relationship. CTA 2009, s 297(3) provides that trading loan relationship debits are treated as expenses of the trade and are therefore taken into account in computing the profits or losses of the trade for that period. For a property investor, interest on a loan taken out to purchase a rental property is not an allowable expense in arriving at the income taxed as profits from a property business. Instead the loan interest is treated as a non-trading loan relationship debit under the loan relationship rules. The
Notification of uncertain tax treatment ― administration
Notification of uncertain tax treatment ― administrationIntroductionThis guidance note follows on from the Notification of uncertain tax treatment ― overview guidance note which explains the scope and operation of the regime. For those companies and partnerships that are within the remit of the rules, the requirement to notify HMRC applies where they adopt an uncertain tax treatment for corporation tax, VAT or income tax (both self assessment and amounts collected via PAYE) and the filing date for that return is on or after 1 April 2022. A return for each of the taxes within the scope of the regime is referred to in the legislation as a ‘relevant return’. The notification obligation applies where a large company delivers a relevant return to HMRC for a financial year and the return contains an amount (including where the amount is nil) which is uncertain at the time the return is delivered or where it becomes an uncertain amount after the return is filed and is due to an accounting provision being made to reflect the probability of a different tax treatment being applied. A relevant return for these purposes includes part-year returns and amended returns. A notification is required for each relevant return that contains an uncertain amount. This means, for example, that a company that makes corporation tax, VAT and PAYE returns for a relevant period may be required to make multiple notifications. Where a relevant return for a relevant tax includes more than one uncertain amount, only one notification
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