Corporate Interest Restriction (CIR) -Fixed Ratio Method
The Fixed Ratio Method (FRM) is the default method used under the Corporate Interest Restriction (CIR) rules for calculating a worldwide group’s basic interest allowance (BIA). This mechanism is crucial for determining the maximum amount of net interest expense that UK companies within a group can deduct for Corporation Tax purposes, assuming the group’s aggregate net tax-interest expense (ANTIE) exceeds the £2 million de minimis threshold. The FRM ensures that the interest deduction is capped based both on the UK group’s profits and the wider global net external financing costs of the worldwide group.
Fixed Ratio Calculation and Interest Expense Limitation
The Fixed Ratio Method under Corporate Interest Restriction dictates the Basic Interest Allowance (BIA) by requiring the group to take the lower of two components:
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30% of Aggregate Tax-EBITD
This sets the limit based on the UK group’s tax performance.
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The Fixed Ratio Debt Cap (FRDC)
This cap restricts the deduction based on the group’s external financing burden.
The calculation must ultimately determine the group’s total Interest Capacity (IC), which is the higher of the statutory £2 million de minimis amount or the BIA (plus any unused allowance carried forward). If the group’s actual net interest expense (ANTIE) exceeds this calculated IC, the excess interest expense is considered the disallowed amount. This disallowed interest is then allocated among the UK companies subject to Corporation Tax.
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Key Metrics: Tax-EBITDA and the Debt Cap
Central to the Fixed Ratio Method is the calculation of Aggregate Tax-EBITDA and the Fixed Ratio Debt Cap (FRDC).
Tax-EBITDA
Tax-EBITDA is calculated by aggregating the adjusted corporation tax earnings of all UK companies within the group. This figure is a UK tax-related version of the commercial concept of Earnings Before Interest, Tax, Depreciation, and Amortization. Specifically, the starting point of the calculation is the company’s taxable profits (Profit Chargeable to Corporation Tax), to which additions are made for elements like tax-interest expense (excluding foreign exchange movements) and relief for depreciation, amortization, and capital allowances.
While traditional accounting often looks at EBIT (Earnings Before Interest and Tax), the CIR rules necessitate adding back depreciation and amortization, focusing on Tax-EBITDA, to establish the appropriate base for the 30% ratio.
Fixed Ratio Debt Cap (FRDC)
The second component, the FRDC, ensures that the maximum allowable UK deduction does not exceed the worldwide group’s total net external finance cost. The FRDC is calculated using the Adjusted Net Group Interest Expense (ANGIE), which looks at the group’s net interest expense (sometimes referred to as NGIE) derived from the consolidated accounts, adjusted to align with UK tax principles. For the current period, the FRDC is generally defined as ANGIE plus any Excess Debt Cap (EDC) brought forward from the preceding period of account. This inclusion of EDC is necessary to ensure that interest disallowed in a prior period, due to fluctuations in profit, can be utilized later.
The Fixed Ratio Method acts like a standardized tax filter, setting a universal boundary (30% of UK earnings) that all groups must meet. However, because it also incorporates the Debt Cap (ANGIE), it simultaneously ensures that the group’s allowed UK interest deduction never exceeds its genuine, overall external financing cost worldwide. This dual constraint limits aggressive tax deductions while reflecting commercial reality.
Conclusion
The Fixed Ratio Method (FRM) stands as the default standard for calculating the Basic Interest Allowance (BIA) under the Corporate Interest Restriction (CIR) regime, becoming mandatory if a group’s UK Aggregate Net Tax Interest Expense (ANTIE) exceeds the £2 million de minimis threshold. The BIA determined under the FRM is defined as the lower of two distinct limits. The first is the 30% fixed ratio applied to the group’s Aggregate Tax-EBITDA, which is a figure based on the UK taxable profits, adjusted by adding back tax-interest expense, depreciation, amortization, and capital allowances, establishing the UK earnings base for the restriction.
The second constraint is the Fixed Ratio Debt Cap (FRDC), which is generally derived from the worldwide group’s external net interest expense, known as Adjusted Net Group Interest Expense (ANGIE), ensuring that the UK deduction does not surpass the group’s overall external finance cost. Because the FRM strictly enforces the 30% cap, groups that are highly geared globally for commercial reasons often find this method inadequate and must instead utilize the Group Ratio Method (GRM) to potentially secure a higher interest allowance.
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