How to Prepare an HMRC Interest Restriction Return (IRR) Correctly
Imagine managing the tax affairs of a large UK company or group and realising, perhaps later than ideal, that interest costs have quietly crept beyond the £2 million mark. At that point, the Corporate Interest Restriction (CIR) rules come into play, limiting how much interest relief can be claimed for Corporation Tax purposes. The Interest Restriction Return (IRR) is the formal mechanism through which HMRC assesses whether those limits have been applied correctly.
Preparing an IRR is not simply a box-ticking exercise. It directly affects how much tax relief your group can retain and how exposed you are to enquiries, penalties, or delayed relief. With changes taking effect for periods ending in and after 2026, understanding the process in full is essential. This guide walks through when an IRR is required, how to prepare it correctly, and where businesses commonly go wrong.
What Triggers an IRR?
The need to file an IRR is triggered when a UK company or group exceeds £2 million in net interest and other financing expenses over a 12 month period. This figure is calculated on a worldwide group basis, not just for UK entities in isolation. Interest payable and receivable must be assessed carefully, using tax-adjusted figures rather than accounting totals.
Remaining below the threshold means no return is strictly required, but many groups still choose to appoint a reporting company and file abbreviated returns. Doing so allows unused interest allowance to be carried forward, which can be valuable if borrowing increases in future periods. Once the threshold is exceeded, however, a return becomes mandatory and the interest allowance must be calculated under either the fixed ratio or group ratio method.
Key Changes in 2026 You Need to Be Aware Of
One of the most significant developments affecting IRRs is the change to reporting company appointment rules for periods ending on or after 31 March 2026. Previously, reporting companies had to be appointed and notified to HMRC within a strict 12 month deadline. Missing that deadline could invalidate an otherwise correct return.
From 2026 onwards, this rigid notice requirement has been removed. A valid appointment must still exist, and it must be authorised by more than 50 percent of the UK tax-paying, non dormant group companies. However, the details are now disclosed directly within the IRR rather than through a separate notification process. This change reduces administrative friction but places greater importance on maintaining clear internal authorisations and records.
Appointing a Reporting Company Correctly
The reporting company acts as the single point of submission for the group’s IRR, making its appointment a foundational step. The entity chosen must be UK resident or within the charge to UK Corporation Tax and must not be dormant for the period in question. Authorisation must be obtained from the required majority of eligible group members.
Although the post 2026 rules allow more flexibility around timing, documentation still matters. Evidence of authorisation should be retained internally, as HMRC may request confirmation during a compliance check. Early appointment is generally advisable, as it allows groups to submit abbreviated returns and preserve allowances even in years where restrictions do not arise.
Filing Deadlines and Submission Requirements
The deadline for filing an IRR is 12 months from the end of the relevant accounting period. This deadline is fixed, and there are no routine extensions available. For example, a period ending on 31 December 2025 would require the return to be submitted by 31 December 2026.
All IRRs must be filed electronically using HMRC’s systems or compatible commercial software. The return includes detailed disclosures such as group structure, ultimate parent details, interest calculations, elections made, and allocations of any disallowed interest across UK entities. Even where no restriction applies, filing an abbreviated return can preserve valuable future relief.
Penalties and Compliance Risks
Failure to file an IRR on time results in automatic penalties. A return submitted up to three months late attracts a £500 penalty, rising to £1,000 if the delay exceeds three months. These penalties apply regardless of whether any tax is ultimately payable.
Inaccurate returns present a more serious risk. HMRC can charge penalties of up to 100 percent of the tax understated where careless or deliberate errors are identified. While reasonable excuse provisions do exist, they are applied narrowly. Early engagement and voluntary disclosure significantly reduce exposure, reinforcing the importance of careful preparation rather than reactive correction.
Gathering the Right Data Before You Start
Accurate data is the backbone of a reliable IRR. Groups must compile net tax-interest expense figures using tax rules rather than accounting definitions. This includes excluding items such as certain foreign exchange movements and ensuring only deductible amounts are considered.
In parallel, UK tax-EBITDA must be calculated with adjustments for capital allowances and other reliefs. Groups using the group ratio method also need consolidated worldwide figures, including third-party interest and EBITDA. Incomplete or inconsistent data is one of the most common causes of HMRC challenges, making early reconciliation essential.
Fixed Ratio or Group Ratio: Choosing the Right Method
The fixed ratio method limits interest relief to the lower of 30 percent of UK tax-EBITDA or the group’s worldwide net interest expense. It is straightforward and often suitable for groups with stable UK profits and moderate borrowing.
The group ratio method, by contrast, uses the group’s actual external leverage and can provide a higher allowance where third-party borrowing is significant. This method requires an election in the IRR and relies on accurate global financial data. Modelling both approaches before filing allows groups to select the method that best aligns with their financing structure.
Completing the IRR Accurately
The IRR itself requires careful attention to detail. Appointment details must be completed correctly, especially under the revised 2026 rules. Calculations must reconcile fully to supporting schedules, and allocations of restricted interest must balance across all UK entities.
Revised returns can be submitted where errors are identified, but repeated amendments may attract scrutiny. Maintaining clear audit trails and working papers reduces the risk of queries and supports smoother interactions with HMRC during reviews or enquiries.
Elections, Carry Forwards, and Future Planning
Beyond compliance, the IRR plays a role in longer-term tax planning. Unused interest allowance can be carried forward for up to five years, but only where the relevant returns have been filed correctly. Similarly, disallowed interest can be reactivated in later periods if capacity becomes available.
Strategic elections, including the group ratio or infrastructure exemptions where applicable, should be reviewed annually. CIR outcomes often interact with wider considerations such as property financing, group restructures, or changes in external funding, making regular reassessment essential.
Common Errors and How to Avoid Them
Groups frequently encounter issues such as failing to aggregate interest correctly across the worldwide group, misunderstanding the threshold, or neglecting to file abbreviated returns. Others make technical errors in tax-EBITDA calculations or omit required disclosures introduced under newer rules.
Avoiding these mistakes requires structured internal processes, clear timetables, and periodic CIR reviews. Early identification of issues allows corrections to be made before deadlines pass, preserving both relief and credibility with HMRC.
When Professional Support Becomes Valuable
The CIR regime is inherently complex, especially for groups with multiple entities or cross-border financing. Sterling & Wells supports UK companies and groups with CIR assessments, IRR preparation, and ongoing compliance, ensuring that changes taking effect in 2026 are applied correctly.
By integrating CIR considerations with wider Corporation Tax and property planning, businesses can move beyond basic compliance and ensure their interest relief position remains robust as financing arrangements evolve.
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