FB 2018-19: corporate interest restriction rules clarified

HMRC is consulting on technical amendments to the corporate interest restriction (CIR) rules, which have been updated as part of the government’s package of wider changes to ensure business profits are taxed in the location in which economic activity takes place

At Budget 2016 the government announced that it would introduce new rules to limit the tax deductibility of corporate interest expense consistent with the OECD recommendations from its base erosion and profit shifting (BEPS) project, effective from 1 April 2017.

The CIR rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense.  They were enacted in Finance (No.2) Act 2017, and were subject to minor amendments in Finance Act 2018.

As a result of further engagement with affected businesses, certain technical amendments to the legislation have been identified that are necessary for the regime to work as intended. Further amendments are being made to the CIR rules in response to changes in lease accounting.

The draft amendments are included in draft legislation for Finance Bill 2018-19 and relate to the CIR rules in Part 10 and Schedule 7A of the Taxation (International and Other Provisions) Act 2010 (TIOPA). 

The proposed revisions will have effect for periods commencing on or after 1 January 2019.

The calculation of adjusted net group-interest expense will be amended to ensure that it deals correctly with capitalised interest and that debt releases with a connected company outside of the group do not distort the calculation.

The calculation of group-EBITDA will be amended to ensure that, when an alternative calculation election has been made, the calculation is aligned with the normal UK tax rules on unpaid employee remuneration.

The interest allowance (non-consolidated investment) election will be amended to ensure that any additional amounts of adjusted net group-interest expense and qualifying net group-interest expense as a result of this election are included as part of a single calculation in such a way that neither the adjusted net-group interest expense nor the qualifying net group-interest expense can be negative.

The public infrastructure rules will be amended to ensure that a company can still have access to these rules if it holds a pension fund asset and/or deferred tax asset, and this will be treated as always having effect.

The public infrastructure rules will also be amended to ensure that where a company is reimbursed for certain variable operating costs incurred under a contract with a public body this do not affect the highly predictable nature of the company’s income and the company can still access the ‘grandfathering rules’.

The rules which deal with the CIR treatment for real estate investment trusts (REITs) will be amended to ensure that REITs are within the scope of the rules as intended and that they do not effectively suffer a double restriction where the financing-cost ratio test at section 543 of Corporation Tax Act 2010 results in ‘the excess’ being charged to corporation tax. The second element of this will be treated as always having effect.

The administrative rules will be amended to extend the time limit groups have to appoint a reporting company or to revoke such an appointment. This will have effect from the date of the bill’s Royal assent.

The administrative rules will also be amended to ensure that HMRC can specify other information, as may be reasonably required, to be included in returns. This will take effect for returns submitted on or after 1 April 2019.

HMRC says the measure is not expected to have any significant economic impacts.

Policy paper Corporation Tax amendments to the corporate interest restriction rules is here.

Report by Pat Sweet

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