A Comprehensive Guide to the UK Corporate Interest Restriction (CIR) Regime
The Corporate Interest Restriction (CIR) regime forms a key, yet highly complex, part of the UK corporation tax framework. These rules are designed to limit the tax deduction available for corporate financing costs. The CIOT (Chartered Institute of Taxation) has confirmed the complexity of the CIR rules, advising that the focus should be on understanding the overall legislation and awareness of its application, rather than attempting to memorize the detailed rules.
Contained within Part 10 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), the CIR was introduced to implement Action Point 4 of the OECD’s recommendations regarding base erosion and profit shifting (BEPS). The complexity is magnified by the rules’ reliance on a wide range of tax and accounting concepts, incorporating aspects of loan relationships, derivative contracts, financing lease arrangements, and debt factoring.
The Purpose and Scope of the Restriction
The core threat the CIR addresses is the manipulation of financing payments within a worldwide group, which could otherwise lead to excessive relief from UK corporation tax. The regime seeks to prevent specific abuses, including:
Groups obtaining third-party loans in high tax countries to maximize tax savings through interest deductions at the group level.
Groups utilizing intra-group loans to generate interest deductions that exceed the interest payable to third parties.
Groups using loans (third-party or intra-group) to generate tax-exempt income.
The CIR rules are calculated on a group basis, utilizing the combined results of a ‘worldwide group’.
The Seven Steps to Calculate the Disallowed Amount
To calculate the amount of a group’s tax interest expense that is disallowed in a period of account, a methodical series of seven key steps must be followed. The ultimate goal is to determine the disallowed amount using the formula: Disallowed amount = Aggregate Net Tax Interest Expense (ANTIE) minus Interest Capacity (IC). If the result is a negative figure, no amount is disallowed.
Step 1: Determine the Worldwide Group and Period of Account
The restriction applies to a worldwide group, which is made up of an ultimate parent company and its consolidated subsidiaries. The worldwide group operates on a group basis rather than a company-by-company basis. The period of account is the period for which the financial statements of the worldwide group (i.e., the consolidated financial statements) are prepared.
Step 2: Calculate Aggregate Net Tax Interest Expense (ANTIE)
ANTIE is the amount of tax interest expense potentially subject to restriction, calculated only for those members of the worldwide group within the charge to UK corporation tax.
Calculate each UK company’s tax interest expense (TIE) and tax interest income (TII).
Determine the net tax interest expense (NTIE) or net tax interest income (NTII) for each company.
Add up the NTIE and NTII amounts for all UK taxable companies to find the ANTIE.
If the result of this calculation is negative, it is referred to as the worldwide group’s aggregate net tax interest income (ANTII).
The De Minimis Limit: If ANTIE is not more than £2 million, the de minimis limit applies, and there will be no disallowed amount, meaning there is no need to proceed to Step 3.
Step 3: Calculate Aggregate Tax EBITDA
This step involves calculating the ‘aggregate tax EBITDA’ of the UK taxable members, which is a required figure for Step 4. Tax EBITDA is a UK tax-related version of the commercial concept of EBITDA, moving towards a cash measure of profits. It is calculated by aggregating the adjusted corporation tax earnings for each UK taxable company. If the result is negative, aggregate tax EBITDA is nil.
Step 4: Calculate Interest Allowance (IA)
The interest allowance (IA) of the worldwide group for the period is calculated using the sum of the basic interest allowance (BIA) and the aggregate net tax interest income (ANTII): IA = BIA + ANTII The BIA must be calculated using the lower result from either the default ‘fixed ratio method’ or the elective ‘group ratio method’:
- Fixed Ratio Method: BIA is the lower of 30% multiplied by aggregate tax EBITDA and the Fixed Ratio Debt Cap (FRDC). FRDC includes the Adjusted Net Group Interest Expense (ANGIE) and any Excess Debt Cap brought forward.
- Group Ratio Method (Elective): BIA is the lower of the group ratio percentage (V%) multiplied by aggregate tax EBITDA and the Group Ratio Debt Cap (GRDC). The group ratio percentage (V%) is calculated as (QNGIE / group EBITDA) multiplied by 100. If V% is less than 30%, the group gains no benefit from electing this method.
Step 5: Calculate Interest Capacity (IC)
The interest capacity (IC) defines the maximum interest deduction available to the group for the period. IC is the higher of:
- £2 million (the statutory figure); and
- The Total Interest Allowance (TIA).
TIA includes unused allowances carried forward: TIA = IA + BFIA. BFIA (brought forward interest allowances) is the aggregate of any unused, unexpired interest allowance brought forward from earlier periods.
Step 6: Calculate the Disallowed Amount
This step involves calculating the amount of tax interest expense that is disallowed by applying the core formula using the figures determined in Step 2 (ANTIE) and Step 5 (IC).
Step 7: Allocate the Disallowed Amount
The final step is to allocate the disallowed amount among the group’s UK taxable companies. Those companies must then restrict the deduction for their financing costs in their respective tax calculations.
Management of Forward Amounts
The CIR regime includes important rules governing the carry forward of both restricted expenses and unused capacity.
Reactivation of Disallowed Amounts
Net interest expense that has been disallowed can be carried forward indefinitely for potential future deduction; this is known as ‘reactivation’. Reactivation takes place at the company level.
Reactivation occurs when the group generates Interest Reactivation Capacity (IRC), meaning its Interest Allowance (IA) is greater than its ANTIE.
A disallowed amount may be lost if the company ceases to carry on its trade or ceases to carry on its investment business. To initiate reactivation, the reporting company must submit a full Interest Restriction Return (IRR) stating that the group is ‘subject to interest reactivations’ in that period.
Expiry of Unused Interest Allowance (BFIA)
If the group’s IA exceeds its ANTIE (and there is no restriction), an Unused Interest Allowance (UIA) arises. This UIA does not carry forward indefinitely; if there is no restriction, it can be carried forward for up to five years, after which it expires. BFIA is the aggregate of these unused, unexpired allowances.
Administrative Requirements
The CIR administration requires the appointment of a reporting company subject to UK corporation tax.
IRR Submission: The reporting company must submit an Interest Restriction Return (IRR) to HMRC. The deadline for submission is within 12 months of the end of the period of account.
Default Allocation: If no IRR is submitted within the deadline, a legislative formula is used to allocate the disallowed amount.
Penalties: Penalties are levied for inaccurate IRRs. The maximum penalty for an inaccuracy resulting from carelessness is 30% of the notional tax, while penalties for deliberate and concealed inaccuracy can reach 100% of the notional tax. Penalties may also be levied for failure to keep and preserve records, which may not exceed £3,000.
Conclusion
The restriction is founded upon comparing the group’s Aggregate Net Tax Interest Expense (ANTIE) against its Interest Capacity (IC), which is largely determined by the Basic Interest Allowance (BIA) calculated relative to Tax EBITDA. While restricted net interest expense can be carried forward indefinitely for later relief through ‘reactivation,’ any Unused Interest Allowance (UIA) carried forward as BFIA is subject to a strict time limit and expires after five years. Effective management of CIR therefore requires precise tracking of these complex allowances and rigorous administrative compliance, particularly the timely submission of the Interest Restriction Return (IRR), to ensure accurate tax relief and the avoidance of significant penalties.
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