It mostly affects large businesses within the charge to Corporation Tax that incur net interest expense and other financing costs (within the scope of Corporation Tax) above £2 million per annum.
The CIR (Corporate Interest Restriction) rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense, however, businesses with an interest expense of less than £2 million are not affected by the restriction.
The amount of interest allowed as a deductible expense for large businesses will be restricted to the lower of 30% of EBITDA and the worldwide group’s net interest expense. For groups, they should to consider making an election to use the group EBITDA if this produces a more favourable result.
Amounts that are disallowed in one accounting period can be carried forward indefinitely and may potentially be reactivated, and deducted, in a subsequent period. A group can also carry forward its unused interest allowance for an accounting period for up to five years.
The filing of an interest restriction return ‘IRR’ may be required if a group wants to make a group ratio election. A reporting company can be nominated within groups.
An IRR will be necessary to:
- allocate any interest disallowance to specific companies within the group (the precise allocation may require thought depending on the group’s tax profile);
- carry forward interest allowances to future periods;
- make various CIR elections; and
- reactivate previously disallowed interest (where the group has interest capacity in future periods).