Businesses with increasing interest costs beware

The corporate interest restriction (CIR) regime broadly seeks to cap the corporation tax relief companies can claim for their interest expenses. A de minimis rule means that the CIR does not apply to corporate groups in a year in which their UK interest expense is less than £2m.

Economic and market factors

The CIR regime has been with us since 1 April 2017, and for many groups and large companies it has become part and parcel of their annual corporation tax compliance cycle. However, the number of businesses within the scope of the CIR regime is growing and is likely to continue to increase, as a result of several economic and market factors.

Significant recent UK M&A activity and an increase in average deal value is likely to have resulted in a material increase in interest expense for some UK businesses where deals are debt funded.

At the global level, interest rates have generally been increasing throughout 2022, driven by inflationary pressures.

In the UK, a significant recent fall in the value of sterling on the foreign currency markets has also put pressure on the Bank of England base rate, which increased to 2.25 per cent in September 2022, up from 0.1 per cent in December 2021, and with further increases expected over the coming months.

For some businesses, these factors may result in a requirement to apply the CIR rules in full for the first time, particularly where the £2m de minimis limit is exceeded. 

As the UK economy is now thought to be in recession, many UK businesses may also have lower earnings and, as a consequence, less capacity to claim tax deductions for interest costs.

Existing requirements

There are a number of obligations under the CIR regime.

The CIR return

A group is not technically obliged to appoint a reporting company and file a CIR return unless it is subject to a restriction on its interest deductibility under the CIR or if a reporting company has already been appointed, but there are a number of circumstances where it is beneficial to do so. It allows certain elections to be validly made, enables interest allowances arising in an accounting period to be carried forward and utilised against excess interest expenses in later periods, and allows disallowed interest to be ‘reactivated’ if there is capacity in a later period. 

Appointing a reporting company

The reporting company should be appointed within 12 months of the end of the CIR return period by a majority of the companies in the group with a UK taxable presence. In certain circumstances, HMRC may appoint a reporting company if a group has not already done so.

CIR return submission deadlines

In general, where all group companies have the same accounting period, the CIR return must be submitted to HMRC by the reporting company within 12 months of the end of that period. This timing can change if group companies draw up their accounts to different dates, and where there is a change in the group’s ultimate parent company. If HMRC appoints the CIR reporting company, the deadline is three months from the date of the appointment.

Abbreviated returns

The legislation allows for an abbreviated CIR return to be filed provided the group is not subject to interest restrictions under the CIR regime. Abbreviated returns are simpler to complete and, if necessary, can be replaced subsequently by a full return should the group need to carry forward an interest allowance or reactivate an interest expense. Many groups choose to take this approach.

New requirements

In addition, there are some recent changes to the CIR reporting requirements that all businesses within scope will need to consider. From 1 September 2022, CIR returns and notices appointing or removing a reporting company must be filed electronically, using appropriate software or by way of HMRC’s online forms These changes reflect HMRC’s increasing use of technology as a means of increasing efficiency and identifying inaccuracies.

Furthermore, from 1 October 2022, CIR returns must include certain additional information about the identity of the worldwide group, elections that have been made, and the financing cost of the worldwide group. The introduction of these additional disclosure requirements may reflect HMRC’s wish to operate what it would consider to be a better targeted risk assessment process. It also reflects a wider focus from HMRC, and the Government more generally, on increasing transparency in relation to group structures.

Next steps

For those groups that are already reporting under the CIR regime, it will be important to ensure that the new electronic filing requirements are followed to avoid the risk of incorrect or late filings, and that the additional information now required can be provided in the next CIR return.

Companies and groups that have not yet been required to report under the CIR regime but may do in future, due to the rising costs of borrowing and the uncertain economic outlook, should consider whether they have any unused interest allowance in accounting periods ended within the last twelve months that could be ‘banked’ by nominating a reporting company and submitting a CIR return. They should also take steps to confirm their understanding of the reporting requirements and deadlines and ensure that the necessary level of detailed information is available to facilitate timely compliance.

For more information, please get in touch with Suze McDonald or your usual RSM contact.