Failure to meet CIR administrative requirements could be costly

A change in HMRC’s approach to exercising its powers under the corporate interest restriction (CIR) legislation could have significant financial consequences for groups of companies that fail to take administrative steps in accordance with the strict requirements of the legislation.

Background

The CIR legislation restricts the level of deductions for ‘tax-interest’ (interest and other financing costs) that may be taken by UK groups of companies (including single company UK groups). The level of restriction is determined by the group’s attributes, but only groups with UK tax-interest expenses exceeding £2m in a tax year face disallowances. Groups can choose how disallowances are allocated between group companies and may make certain other elections at group level. As corporation tax is chargeable on an entity basis, a separate CIR group compliance regime deals with these aspects.

The CIR group compliance regime entails the submission of a CIR return via HMRC’s online portal. As well as enabling groups to allocate interest disallowances and make certain potentially beneficial elections, such as a group ratio election, submitting a CIR return may also allow:

• previously disallowed tax-interest to be ‘reactivated’ and deducted in a later year; and
• unused interest allowances to be ‘banked’ and carried forward for up to five years.

If no CIR return is submitted, disallowances must be allocated to group companies on a pro rata basis, in line with the tax-interest expense of each company, with no account taken of reactivated tax-interest or carried forward allowances.

Appointing a reporting company

In order to submit a CIR return, a reporting company must be appointed, even for single company groups, which is then responsible for the submission of CIR returns (and is liable for penalties if it is late in doing so). 

To appoint a reporting company itself, a group must make an online nomination, broadly within one year of the end of its ultimate parent entity’s financial year. Once made, the appointment stays in effect for subsequent periods until revoked or until there is a change in the ultimate parent of the worldwide group. 

If a valid nomination is not made before the deadline, groups may ask HMRC to appoint a reporting company. HMRC is not obliged to make such an appointment, but has discretion to do so within three years of the end of the worldwide group’s accounting period, or later in certain circumstances. Where HMRC appoints a reporting company for a particular period, this will not carry over to subsequent periods.

HMRC’s change of approach

The deadline for groups to nominate a reporting company is tight and there is scope for misunderstanding the requirements. In particular, it is important to note that a new reporting company is required where there is a change in ultimate parent entity, even if the overall composition of the group does not change aside from that. 

Perhaps as a result, HMRC has, in the past, taken a relatively pragmatic approach to requests for it to appoint a reporting company. However, in new guidance, HMRC has clarified that it will no longer appoint a reporting company simply because a group has failed to meet the nomination deadline, and later realises that it would be beneficial to have a reporting company.

Experience confirms this change in approach, and we are aware that HMRC has refused to appoint a reporting company in situations it might previously have been expected to do so. The new guidance states that ‘HMRC will continue to use its power to appoint a reporting company where there is a risk that tax is at stake’, and hence it appears that it will only appoint a reporting company where doing so will help it to collect tax.

The practical consequences

Submitting a CIR return has administrative benefits, and, more importantly, it can also mitigate potentially significant additional tax liabilities. If no reporting company is appointed, it is not possible to submit a CIR return, and the consequences could include:

• an inability to allocate disallowances to make the best use of available tax losses;
• an inability to make group ratio elections, which can mitigate the impact of the CIR where a group has significant third party debt;
• an inability to make other beneficial elections;
• missing out on the ability to reactivate and claim deductions for previously disallowed interest expenses; and
• an inability to preserve or access unused interest allowances.

HMRC’s change in approach means that failure to comply with the requirement to nominate a reporting company within the required timeframe could be a very costly administrative oversight - in some situations, the cost could be millions of pounds of additional tax.  

Action required

To mitigate avoidable tax liabilities, groups that would benefit from the ability to submit a CIR return should ensure that a valid reporting company nomination is in place. If they fail to do so, HMRC’s new approach means it is unlikely to come to the rescue.

Groups that have submitted CIR returns without a valid reporting company nomination in place, for example if there has been a change in ultimate parent entity, should act now to resolve historic issues as soon as possible. Particular attention should be given to resolving issues before the deadline for filing an amended corporation tax return (24 months after the year-end), as the allocation of losses and other reliefs in such a return may help mitigate the consequences of not being able to submit CIR return. 

For more information, please get in touch with Hannah Lloyd or your usual RSM contact.