KPMG’s BEPS team brings you regular insights, updates and opinion on all matters concerning the UK’s implementation of BEPS Action 4.
KPMG’s BEPS team brings you regular insights, updates and opinion on all matters concerning the UK’s implementation of BEPS Action 4.Hosted by Daniel Head, Tax Partner, we will be keeping you updated on all the latest developments in relation to the UK’s proposed new regime for the deduction of corporate interest expense. We will be considering issues arising from the drafting and implementing of the legislation as well as the implications for specific industry sectors. If you would like to receive regular updates on BEPS Action 4, please subscribe to Tax Matters Digest. You can also access the diary archive here, if you would like to see more insights.
KPMG's Melissa Geiger, Gavin Little and Chris Murphy discussed the steps you will need to take in order to get to grips with the compliance aspects of CIR. From deciding how to coordinate CIR compliance across a group, to which elections to make, this webinar covered what you need to do in advance of the normal compliance cycle.
The UK’s new corporate interest restriction rules took effect from 1 April 2017, and will, broadly speaking, limit a group’s UK tax deductions for its net interest expense to the lower of a percentage of the UK tax EBITDA, taken from the tax computations, and a measure of the net group interest expense, taken from the group accounts. While we would recommend that businesses consider the implications of these rules, it is recognised that their application, in practice, can be extremely complicated. The devil is very much in the detail, and with that in mind, we have produced a series of articles looking at the detail of the rules in ‘bite sized chunks’. These articles can be found below.
The UK’s corporate interest restriction regime applies from 1 April, and draft guidance and regulations have now been published
Debt cap when applying the fixed ratio method.
We look at two elections which adjust the group ratio method calculation.
Related parties aspects of the group ratio method provisions
This article looks at the rules surrounding the public benefit infrastructure exemption for certain non-related party debt.
Commencement and transitional provisions of the new CIR regime.
How do you identify the ultimate parent and the worldwide group?
The next article in our series looks at some issues linked to the CIR group
Administrative requirements of the new regime.
This week’s article looks at more of the administrative requirements of the new regime.
Interaction of the CIR rules with M&A transaction considerations.
This week’s article continues our look at the interaction of the CIR rules with M&A transaction considerations.
This article looks at how the regime applies to derivative contracts.
CIR regime interaction with the new rules on loss relief.
This week’s article looks at how quarterly instalment payments of corporation tax may be impacted by the new CIR rules.
This week’s article looks at the treatment of amounts carried forward under the CIR regime.
Treatment of leases.
This week’s article looks at the regime anti-avoidance rule.
Potential impacts of the new regime on banking groups.
Potential impacts of the new regime on insurance groups.
This week’s article looks at some potential impacts of the new regime on charities.
This article looks at the treatment under the CIR rules of amounts recognised in respect of intangible fixed assets.
The potential regime impact on controlled foreign companies
This article looks at ‘normal’ UK resident companies investing in UK real estate and the pros and cons of applying the public infrastructure exemption.
This week we consider the position of UK and non-UK resident companies holding UK real estate as an investment property and earning rental income.
Application of the CIR rules to real estate investment trusts.
How do the CIR rules apply to corporate JVs?
This week we look at the CIR rules as they apply to JVs structured as partnerships.
This week we look at the implications of the CIR regime for property trading companies.
A previous diary entry noted that, on Friday 1 December 2017, the government published Finance Bill 2018,including certain amendments to the CIR rules.
One of those amendments was to treat an interest in an entity that is “held for sale” under IAS as being a“non-consolidated subsidiary” (and therefore excluded from the CIR group).
The government have now tabled an amendment to this provision extending it to cases where an interest in an entity is “held for sale or held for distribution to owners”.
On Friday 1 December 2017, the government published a draft Finance Bill 2018, including certain amendments to the CIR rules.
The amendments essentially implement the changes announced at the Autumn Budget, which were summarised in our previous diary entry.
In terms of further clarification regarding specific changes previously announced in the Budget Notice.
The CIR rules were finally enacted on 16th November 2017, with retrospective effect from 1st April 2017. However, on 22 November 2017, as part of the Autumn Budget 2017, the Government announced that, following further engagement with affected businesses, various amendments will be made to the enacted legislation to ensure the CIR rules work as intended.
Read our full article here.
On 4 August HMRC published a second tranche of draft guidance on the new Corporate Interest Restriction (CIR). It reflects the updated legislation published on 13 July. HMRC have requested comments by 31 October 2017.
The updated draft guidance has been expanded to include guidance on:
Various other amendments have been made to reflect changes made in the revised draft legislation published on 13th July 2017.
On 13th July 2017, the government confirmed that the Corporate Interest Restriction (“CIR”) rules will be included in a Finance Bill to be introduced as soon as possible after Parliament's summer recess and will continue to have a start date of 1 April 2017.
The government also published a revised draft of the CIR legislation. The fundamental structure of the rules remains unchanged. The amendments made are mostly to (i) fix minor errors, (ii) clarify the intended effect of the legislation, (iii) tighten certain existing definitions / conditions and/or (iv) address policy concerns that have been raised with HMRC in consultation.
There remain some issues with the way that the rules operate in certain scenarios that have been raised with the government in consultation, but which remain unaddressed in the revised legislation. For example:
On 28 June 2017, we held a webinar to discuss the latest position on the draft Corporate Interest Restriction legislation and practical issues that businesses should be thinking about.
The recording can be accessed here, and a copy of the slides here. In this Tax Diary update, we answer the questions put to us during the webinar which we believe will be of interest to the wider audience. If you have any further questions or comments please get in touch and we will be happy to help.
Please note that the answers provided to the questions below are based on the draft legislation contained in the original Finance Bill published on 20th March 2017 and draft HMRC guidance published on 31 March 2017. They are general in nature and not tailored to any particular circumstances. Specific tailored advice should always be obtained and the position will need to be reviewed as and when any revised legislation and/or guidance is published.
Q1. Do the rules commence for periods starting after April 2017 or spanning April 2017?
A. The latter: the rules apply to groups with a period of account straddling 1 April 2017 (assuming 1 April 2017 is confirmed as the start date). For example, for a 31 December 2017 year end it will be necessary to apportion the figures for the year between the pre- and post-1 April 2017 periods.
Q2. In considering the net interest expense, do non-interest charges which relate to financing (e.g. bank arrangement fees) come into the calculating? Or is it only interest paid?
A. Non-interest amounts would qualify as “tax-interest” to the extent that they give rise to relevant loan relationships debits or credits. Bank arrangement fees would normally qualify as deductible under the loan relationships regime. (See below re fees relating to finance leases and debt factoring.)
Q3. When determining the group’s “aggregate net tax interest expense”, is this worldwide or just UK?
A. The group’s aggregate net tax interest expense is calculated by reference to UK corporation-tax paying group companies only (i.e. group companies that are UK resident or non-resident but operating via a taxable UK branch).
Q4. Is a Defined Benefit Scheme Pension Interest Cost included in calculating tax-interest?
A. Only debits arising from loan relationships, derivative contracts and “relevant arrangements or transactions” (broadly, finance leases, debt factoring and service concessions) are included in calculating tax-interest. On that basis, any “interest cost” recognised in a company’s accounts in respect of its obligations under a defined benefit scheme should not fall within the definition of tax-interest.
Q5. Does tax EBITDA include the addition of net tax interest expense / capital allowances etc. to what is effectively your PCTCT?
A. Broadly speaking, yes. The starting position is the company’s “adjusted corporation tax earnings” which is essentially the company’s PCTCT, but adjusted to take into account current period losses and other amounts that would have been brought into account in determining taxable profits for the period had there been sufficient profits. The following amounts are then excluded from this figure: (i) tax-interest income or expense amounts; (ii) capital allowances or balancing charges; (iii) excluded relevant intangibles debits or credits; (iv) losses surrendered by another company (apart from losses that arose while the company was not part of the group); (v) non-capital losses carried forward or back from another accounting period; and (vi) certain qualifying tax reliefs (e.g. R&D, parent box, qualifying charitable donations). An adjustment is also made to excluded any income to the extent it is effectively exempt from UK tax by virtue of double tax relief.
Q6. What is the interaction of "tax EBITDA" etc with brought forward trading losses please?
A. Per the answer to the previous question, in arriving at a company’s tax-EBITDA for a period, you would add back any non-capital (e.g. trading) losses that have been brought forward to the period.
Q7. When calculating tax EBITDA, does this exclude amortisation of
capitalised project costs?
To the extent such project costs are of a capital nature, they will already be excluded in calculating a trading company’s taxable profits (and therefore, by extension, will already be excluded in calculating the company’s tax-EBITDA). However, any capital allowances claimed in respect of such project costs would need to be excluded. To the extent such project costs are of a revenue nature, they will not be excluded in calculating a trading company’s taxable profits and need not be excluded in calculating the company’s tax-EBITDA. (Note that separate rules apply where costs are capitalised into an intangible fixed asset.)
Q8. Would fees charged in connection with finance lease and debt factoring arrangements qualify as tax interest for purposes of the rules?
A. “Tax interest" includes amounts in respect of the financing costs implicit in amounts payable under a [finance lease or debt factoring arrangement]”. So any fees charged would only be included in tax interest, to the extent they are deductible for corporation tax purposes and form part of the overall financing cost implicit in the arrangement. We understand that the Finance and Leasing Association (FLA) is discussing this with HMRC with a view to clarifying the treatment.
Q9. CFM95260 - Is the reference to “long funding operating leases” intended? CFM95660 mentions finance leases only.
A. Yes. CFM95660 is dealing with tax interest expenses / income. For this purpose, only finance leases are taken into account. CFM95260 is dealing with tax-EBITDA. For this purposes, certain adjustments are made in respect of amounts under finance leases and long funding operating leases.
Q10. How do the rules cater for leasing companies which do not show interest income (as such) in their P&L?
A. There are no specific detailed rules to deal with this – the rules just require you to identify the “amount in respect of the financing income implicit in amounts receivable under the finance lease”.
Q11. How do you define related party for interest purposes?
A. Parties will be related if any one of three conditions is met:
Note that (i) in certain circumstances, rights of other persons will need to be aggregated for the purposes of determining whether parties are related; (ii) there are certain exemptions which deem specific loans or other financing transactions not to be between related parties; and (iii) there are certain deeming provisions which can deem specific loans or other financing transactions to be between related parties (these override the exemptions where relevant).
For further detail on the related party rules, please see our article of 31 May 2017 here.
Interaction with loss relief
Q12. If we have a disallowance in any year, and brought forward losses in an entity, can we effectively swap a company loss asset for a group reactivation asset therefore?
A. Yes, to the extent the relevant loss-making company has net tax-interest expense for the period that can be disallowed and the disallowance generates profits that can be offset by the brought forward losses (taking into account any restrictions imposed by the new rules on loss relief that are also expected to apply from 1 April 2017).
Carry forward and unused interest allowance
Q13. If you fall out of rules due to de minimis, can you still establish unused capacity?
A. Yes if you appoint a reporting company and submit “full” returns for all relevant periods. If a group initially files abbreviated returns and subsequently has a need to access interest allowance there is an extended time limit of up to 60 months for submitting a revised full return. Note that full returns would need to be submitted not only for the period of account when the excess interest allowance arose, but also any intervening periods.
Q14. For interest allowance and the order of offset, do you take the current year before the brought forward amount?
A. Yes, any current year interest allowance must be used in full before
any brought forward interest reactivation can be utilised.
Q15. How are 50:50 Joint Ventures dealt with?
A. If neither JV partner would consolidate the JV under IAS, the JV will
not form part of either JV partner’s worldwide group and would form its own
worldwide group for CIR purposes. Note however that the JV may be able to make an election to “piggy back” off the JV partners’ blended group ratio, if this would give the JV a higher group ratio.
Q16. How do you treat JV's which are not consolidated but appear as a one liner in the consolidated income statement as "share of post-tax profit of joint ventures?
A. First, you need to ask whether the JV would be consolidated under IAS (If IAS is not actually used in the group accounts). If the JV would not be consolidated under IAS, it will not form part of the worldwide group. However, an election can be made to allow the investor group to “look through” a “non-consolidated associate” and include its proportionate share of the JV’s interest expenses and EBITDA when calculating its fixed ratio debt cap, group ratio and group ratio debt cap.
Order of disallowance or reactivation of debits
Q17. CFM95220 and CFM98580 refers to a default order in which different classes of tax-interest are disallowed, which the company can elect to override. CFM98620 refers to a default order in which different classes of tax-interest may be reactivated, which the company can elect to override. Where are these points explained in the draft guidance?
A. There is no substantive guidance on these provisions at present. The relevant draft legislation is at s.377 and s.380 TIOPA. The default order of disallowance/reactivation is:
Q18. Regarding time limits for the interest restriction return, would you have to submit a draft return if not all UK Company tax returns have been submitted by the 12 month date?
A. The draft rules allow a return with estimated numbers to be submitted. However, where any estimates are used, (i) the return must specifically identify these estimates and (ii) the reporting company must notify HMRC if any estimates have not been finalised within 36 months after the end of the period of account (with HMRC having a discretion to permit a late revised return in such cases).
Q19. Does an interest restriction return have to be submitted even if there is no restriction? I.e. a nil return.
A. Draft HMRC guidance confirms that where the group reasonable estimates that the £2m de minimis exemption applies, the group will not need to appoint a reporting company or submit an interest restriction return.
If the group has more than £2m p/a aggregate net tax interest expense but reasonably estimates that it will not suffer a disallowance, it will need to appoint a reporting company and submit an interest restriction return. It will have the option to submit an abbreviated return, although if that approach is taken, the group will not be able to use any excess interest allowance for that period in a later period.
As reported yesterday in both the tax and mainstream press, a number of measures have been dropped from the Finance Bill 2017. This is in order to enable it to pass into law before Parliament closes for business in advance of the General Election.
The measures dropped include the Corporate Interest Restriction (and other key corporation tax measures such as the reform of the loss regime and SSE regime).
So what does this mean for the implementation timetable of the CIR regime? Jane Ellison MP (the Financial Secretary to the Treasury) stated that whilst a number of clauses will not be proceeding, “there has been no policy change” and those measures which are not included in this Bill will be brought forward in a Finance Bill at the first opportunity after the election.
It is therefore our assumption that - assuming the Conservatives remain in Government post-election - the commencement date for the CIR will remain as 1 April 2017, but that we will not see finalised legislation until later in 2017.
Questions of course remain over what the timetable will be for both the finalisation of the legislation, and the associated documents, such as the guidance notes.
On 31 March HMRC published draft guidance on the new Corporate Interest Restriction rules which take effect from 1 April 2017. The announcement states that “This is an initial tranche of guidance, focusing on the core rules and other aspects where guidance has been specifically requested. Further draft guidance will be issued by 31 May 2017.”
FB 2017 made a number of changes to the draft CIR legislation. For more information, please click here. On 31 March an expert KPMG panel will be discussing the implications of the new rules. To register and have your questions answered, please click here.
As flagged in previous Tax Diary posts, one of the points which we raised with HMRC during the consultation period was how the new regime would interact with the tonnage tax regime.
We have now received confirmation from HMRC that it is their intention to exclude tonnage tax profits for the purposes of calculating a company’s Tax-EBITDA and interest allowance. They have stated that this is to ensure that the tonnage ring fence remains intact and will maintain the integrity of the new CIR rules.
Tonnage tax profits are deemed profits which replace the actual relevant shipping profits for tax purposes (see para 4, Sch 22 of FA 2000). The deemed profits are usually very low and so the effect of excluding these tonnage tax profits from tax-EBITDA will be to ensure companies are not allowed to deduct more interest by virtue of tonnage tax activities. There would appear to already be a provision to this effect within the tonnage tax legislation, but by also including this within the CIR legislation, it clarifies the position.
Overall, we would expect the effect of this exclusion from the CIR regime to be limited in its application. However, by clarifying the position, it does arguably simplify the compliance process for those affected (as the finance cost adjustment can be calculated before the CIR calculations, therefore avoiding the need to revisit and adjust the interest restriction).
We have produced the attached document which summarises the implications of the new CIR regime for groups operating in the infrastructure sector. In particular, we consider the Public Benefit Infrastructure Exemption (PBIE). For more information, or if you would like to discuss the impact on your business, please contact Naz Klendjian.
HMRC are continuing to draft and refine the legislation which will introduce the new Corporate Interest Restriction (CIR) regime, from 1 April 2017. The latest draft of the legislation is available here.
In addition to the more formal consultation process, stakeholders (including KPMG) are engaging in an ongoing dialogue to feed in comments and suggestions, for example:
On 6 February, HMRC published guidance on the transfer pricing aspects of cash pooling. This is intended to provide guidance to both taxpayers (and their advisors) and HMRC specialists and client relationship teams.
It has been structured to provide guidance on a full range of issues associated with cash pooling, from its most basic form to some of the more complex issues associated with a substantial cash pool header. For example, it includes commentary on
The new guidance has been subject to a lengthy period of development within HMRC and highlights the fact that HMRC are now more focused than ever on the transfer pricing implications of related party financing transactions. In addition to the new guidance we have also started to see more ‘live’ enquiries from HMRC in relation to cash pooling arrangements and the role of Group treasury entities.
If you have any questions or comments in relation to this guidance or would like to discuss the transfer pricing considerations for cash pooling or Group treasury functions in more detail please contact us.
The much anticipated update to the draft legislation on the new corporate interest restriction was published on 26 January for comments. This new draft legislation supersedes the draft legislation originally published on 5 December 2016 as part of the draft Finance Bill 2017 clauses, and contains information on the remaining elements of the rules.
The update extends the draft legislation to a total of 132 pages and includes the draft legislation for the following key aspects of the new regime:
We are working through the significant amount of detail set out in the draft legislation. However, initial observations are that certain policy changes have been made in response to comments received on the initial draft that was issued in December. These include:
In addition, the Government has clarified that if a group has aggregate net tax-interest income for a period, that amount may then be added to the interest allowance for that period. This will allow the carried forward interest amounts that can potentially be deducted in subsequent periods to be increased by the amount of net tax-interest income.
Consequential amendments to regulations for Authorised Investment Funds, Investment Trust and Securitisation Companies will be published separately in draft for comment.
The Government has requested that any comments on the new draft legislation should be provided by 23 February. KPMG will be providing comments, and if you would like us to include any points on your behalf, please do get in touch with Daniel Head.
On 13 December, we held a webinar to discuss the draft Corporate
Interest Restriction legislation that was published with the draft Finance Bill
in early December. The recording of this, and a copy of the slides can be accessed here.
In this Tax Diary update, we answer the questions put to us during the webinar which we believe will be of interest to the wider audience. If you have any further questions or comments please get in touch and we will be happy to help.
In addition, you will be aware that HMT and HMRC are welcoming comments on the draft legislation, and have requested these are provided by 1 February 2017. KPMG will be submitting a response, and if you have specific points that you would like us to consider as part of our response, please do let us know as soon as possible.
We also note that not all of the draft legislation was released in December and certain key elements of the new rules (operation of the GRR and specific definitions) have not yet been set out in legislation. An update is expected by the end of January 2017 and we would expect a further period of time to provide comments to HMT and HMRC on these updates but this is to be confirmed.
1. How will capitalised interest be treated under the new regime?
It is our understanding that capitalised interest will be included within tax-EBITDA (refer 2.20, Response to the Consultation).
The document sets out the concerns raised in the previous consultation, including the suggestion made by some respondents that capitalised interest should be excluded from the definition of tax-EBITDA. However, the Government’s response is clear: it remains the intention to
include in tax-EBITDA those items which are also included in taxable profit. This would therefore include capitalised interest.
The GRR will however include an optional adjustment for capitalised interest on development property and other items of trading stock (refer 3.9, Response to the Consultation).
2. How will losses surrendered by way of consortium relief be treated under the new regime?
Deductions for consortium relief (and group relief, including the proposed carried forward group relief) from companies within the ‘worldwide group' are excluded for the purposes of calculating tax-EBITDA.
Conversely, if consortium relief is claimed from companies outside of the ‘worldwide group’, it is included for the purposes of calculating tax-EBITDA.
3. How will the proposed changes to the leasing standard interact with the new regime?
At the current time, there have been no specific announcements regarding the interaction of the regime with the new leasing provisions. However, in their Response to the Consultation document (6.12), the government states that it will keep this under review as part of engaging on the treatment of lease payments more generally in advance of the introduction of IFRS 16.
4. Is there any commentary on interaction with tonnage tax finance cost adjustment?
No, neither the draft legislation nor the Response to the Consultation document
comment on tonnage tax. We will include this query in our comments to HMT/HMRC.
5. Is there any benefit to front loading interest charges in the period up to 31 March?
Any company with an accounting period which straddles the commencement date will need to apportion interest between pre-commencement and post-commencement periods. Amounts should be allocated on a time basis, or if this results in an unjust or unreasonable apportionment, amounts should instead be apportioned on a just and reasonable basis (Part 10, Schedule 7 of the draft provisions).
Therefore, it would seem unlikely to be any benefit in front loading, or prepaying, interest charges.
The exception to this may be where the late paid interest rules have applied to historic interest charges. Depending on a group’s fact pattern, there may be a benefit in paying any ‘arm’s length’ accrued but unpaid interest before the new rules commence on 1 April 2017. This would ensure that tax relief can be claimed for these historic arm’s length amounts and remove the risk of further restrictions on historic interest charges as a result of the new rules.
This should be assessed on a case by case basis, depending on the group’s broader fact pattern.
6. Should companies continue to agree ATCAs with HMRC?
This depends on the company’s situation and the desired level of certainty. The new regime is much more prescriptive and mechanical than the current regime so there should be less uncertainty regarding the application of the new rules.
However, it is worth remembering that the new regime will apply after consideration of all other existing tax rules including the transfer pricing rules (the arm’s length provision), unallowable purpose rules, anti-hybrid rules, group mismatch rules and distribution rules. An ATCA would therefore still provide clarity on the application of the transfer pricing rules and therefore the starting position when considering the new interest restriction regime.
HMRC have indicated that they are very much still open to entering into ATCAs where these are desirable for the tax payer.
7. Our group will fall below the £2m de minimis threshold. Will we still need to appoint a “reporting company” and notify HMRC?
It is our understanding that it is only necessary to appoint a reporting company and notify HMRC if the group meets (or exceeds) the £2m de minimis threshold. However, we will confirm this point when we provide comments on the draft legislation later this month.
8. Will the IRR return appear as a supplementary schedule to and be included within the "usual" corporation tax return?
We would expect this to be the case, but again, we will confirm this when we provide comments on the draft legislation later this month.