New rules to limit the tax deductibility of corporate interest expenses were first introduced in 2016 and became effective as of April 1, 2017.
These Corporate Interest Restriction (CIR) rules restrict the ability of large businesses to reduce their taxable profits using excessive UK interest expenses and were officially brought into law as part of the Finance (No.2) Act 2017.
Now these rules have been updated as part of The Finance Act 2018-19.
The changes mean a number of technical amendments to the CIR rules to, as the government states, “ensure the regime works as intended”.
But what exactly are CIR rules, and which changes should businesses be most aware of?
Reporting requirements under the CIR rules
CIR rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense. How a company reports under these rules depends on which of two categories they fall into:
- Companies deducting less than £2m in a 12 month period – in this scenario a company does not need to submit a CIR return but is required to keep documents to show they will not deduct more than £2m in net interest and financing costs within the accounting period.
Even these companies not required to submit a return may wish to do so because it means they can carry forward unused interest allowance for up to five years, which could help to reduce future interest restrictions.
To do this the company simply needs to appoint a reporting company to submit an abbreviated return – replacing this with a full return when needed.
- Companies deducting more than £2m – These companies must calculate their company’s or group’s interest allowance, which is the maximum amount of net interest and financing costs they can deduct in a given accounting period.
Within this scenario a company can either use a fixed ratio or group ratio method (choosing whichever gives them the largest allowance, and keeping a record of their calculation).
If the company’s or group’s net interest and finance costs are restricted, they should appoint a reporting company normally within six months of the end of the accounting period, submitting a full CIR return after that.
It is worth noting however that while the nomination of a reporting company must normally be made within six months, this has been extended within the new rules and this deadline has now been extended until 12 months after the end of the relevant accounting period.
This brings the appointment deadline in line with the filing deadline for the interest restriction return.
IFRS 16 on finance leases
CIR IFRS 16 removes the distinction between a finance lease and an operating lease and treats the financing expense on finance leases like it was interest. This could have a significant impact on the accounting rules for any company or group affected by the rules.
It means that companies with a ‘right to use’ lease will need to assess whether they should define this as a finance or operating lease.
It is hoped the change will create consistency with existing rules and also for any company operating on another accounting standard.
While this could have potential drawbacks for some companies due to an added layer of complexity in classification, it also presents some benefits; particularly for leases treated as small value items that may have been treated as finance leases but no longer fall into a ‘on balance sheet’ category under the new rules.
Financial assets and liabilities
Other changes within the new rules aim to align amounts taken from a group’s adjusted net group-interest expense and those from the tax computations. This is either on a mandatory or elective basis.
For instance, the new rules state that amounts capitalised as a value of a financial asset or liability will only be included within a group’s adjusted net group-interest expense, once they have been written off in the group’s consolidated accounts.
The new rules also look to align the recognition of amounts in relation to the release of loans with joined up companies outside of the central CIR group as it relates to their treatment of UK corporation tax.
This change will be relevant when a group company is treated as a separate CIR group if its results are not consolidated on a line-by-line basis.