Corporate interest tax relief explained
Until recently, interest on debt has largely been deductible for corporation tax purposes. In April 2017, however, that all changed. Under new – and rather complex – rules, the deductibility of interest and the costs associated with raising finance became restricted. Here, we provide a brief summary of the changes.
In brief, the Corporate Interest Restriction (CIR) means that relief for a UK corporation group’s net interest expense is limited to 30% of its taxable earnings before interest, tax, depreciation and amortisation. Every UK group now benefits from a minimum interest allowance of £2 million; those whose interest expense is less than £2 million will therefore remain unaffected by the new legislation.
What is the purpose of the changes?
The government has stated that the changes have been made to align tax deductions on interest expenses with the economic activities undertaken in the UK. This, according to the official statement on the government website, is “consistent with the UK’s more territorial approach to corporate taxation.”
Who is affected?
On the whole, larger groups who have used aggressive tax planning measures in the past by utilising debt to reduce their tax bill will be impacted by the changes. The main result for such organisations is a higher cost of capital. Multinational businesses that engage in proportionately higher borrowing within the UK compared with the rest of the global group have also been affected. The measure means that the way investment decisions are made by groups will need to change, as some marginal investments will now not prove economic.
Up to 3,800 large business operating in the UK are thought to have been impacted, many of these being multinational organisations.
What can businesses do?
It’s probable that if your business has already been affected, you’ll have made the necessary changes to processes already. If, however, your corporation group is experiencing growth, or you’re a multinational looking to branch into the UK, you’ll need to make some preparations for compliance.
One-off costs might include the introduction of new systems and gaining advice from a specialist tax accountant. There will then be on-going costs to consider, such as the cost of admin to remain compliant and the cost of appointing a reporting company from the group to compile and submit a Corporate Interest Restriction return.
A full return must include the following:
- The name and UTR of the ‘ultimate parent’ of the group
- The names and UTRs of the other organisations in the group
- A statement that no disallowance has been made
- A statement confirming the return’s accuracy
- A statement of calculations, tax interest details and interest allowance for the UK companies subject to UK Corporation Tax
- If disallowances or reactivations of interest have been made, statements detailing how they’re allocated
If you’re submitting the CIR for the first time, seek advice from a financial or tax advisor before proceeding with the return. This will help to ensure its accuracy and reduce the likelihood of an investigation being initiated.