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Corporate Interest Restriction (BEPS Action 4) Diary

BEPS Action 4 Tax Diary

KPMG’s BEPS team brings you regular insights, updates and opinion on all matters concerning the UK’s implementation of BEPS Action 4.


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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.

Tax Matters Digest - Corporate Interest Restriction 'devil is in the detail' series

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. 

Corporate interest restriction regime (CIR) - draft guidance and regulations

The UK’s corporate interest restriction regime applies from 1 April, and draft guidance and regulations have now been published

CIR: ‘the devil in the detail’ - debt cap when applying the fixed ratio method

Debt cap when applying the fixed ratio method.

CIR ‘devil is in the detail’ – elections to amend the group ratio method

We look at two elections which adjust the group ratio method calculation.

CIR ‘devil is in the detail’ – group ratio method and related parties

Related parties aspects of the group ratio method provisions

CIR ‘devil is in the detail’ - PBIE

This article looks at the rules surrounding the public benefit infrastructure exemption for certain non-related party debt.

CIR ‘devil is in the detail’ – transitional rules

Commencement and transitional provisions of the new CIR regime.

CIR ‘devil is in the detail’ – identifying 'worldwide' group

How do you identify the ultimate parent and the worldwide group?

CIR ‘devil is in the detail’ – the role of a group in calculations

The next article in our series looks at some issues linked to the CIR group

CIR ‘devil is in the detail’ – administrative requirements I

Administrative requirements of the new regime.

CIR ‘devil is in the detail’ – administrative requirements II

This week’s article looks at more of the administrative requirements of the new regime.

CIR ‘devil is in the detail’ – implications for M&A transactions Part I

Interaction of the CIR rules with M&A transaction considerations.

CIR ‘devil is in the detail’ – implications for M&A transactions Part II

This week’s article continues our look at the interaction of the CIR rules with M&A transaction considerations.

CIR ‘devil is in the detail’ – derivative contracts

This article looks at how the regime applies to derivative contracts.

CIR ‘devil is in the detail’ – interaction with loss relief rules

CIR regime interaction with the new rules on loss relief.

CIR ‘devil is in the detail’ – quarterly instalment payments

This week’s article looks at how quarterly instalment payments of corporation tax may be impacted by the new CIR rules.

CIR ‘devil is in the detail’ – carried forward amounts

This week’s article looks at the treatment of amounts carried forward under the CIR regime.

CIR ‘devil is in the detail’ – leasing

Treatment of leases.

CIR ‘devil is in the detail’ – the regime anti-avoidance rule

This week’s article looks at the regime anti-avoidance rule.

CIR‘devil is in the detail’ – banking groups

Potential impacts of the new regime on banking groups.

CIR ‘devil is in the detail’ – insurance groups

Potential impacts of the new regime on insurance groups.

CIR ‘devil is in the detail’: Charities

This week’s article looks at some potential impacts of the new regime on charities.

CIR  ‘devil is in the detail’ – intangible fixed assets

This article looks at the treatment under the CIR rules of amounts recognised in respect of intangible fixed assets.

CIR 'devil is in the detail' - controlled foreign companies

The potential regime impact on controlled foreign companies

CIR ‘devil is in the detail’ – real estate I

This article looks at ‘normal’ UK resident companies investing in UK real estate and the pros and cons of applying the public infrastructure exemption.

CIR ‘devil is in the detail’ – real estate II

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.

CIR ‘devil is in the detail’ – REITs

Application of the CIR rules to real estate investment trusts.

CIR 'devil is in the detail' - joint ventures

How do the CIR rules apply to corporate JVs?

CIR 'devil is in the detail' - partnership JVs

This week we look at the CIR rules as they apply to JVs structured as partnerships.

CIR 'devil is in the detail' - property trading companies

This week we look at the implications of the CIR regime for property trading companies.

Draft Finance Bill Amendments to the CIR Rules Published

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.

  • Commencement rules – As expected, broadly speaking, new relieving provisions will apply from 1 April 2017, whereas new restrictions will apply from 1 January 2018.  Although the commencement rules for the latter provisions seem to be drafted as a self-standing rule requiring all groups with financial statements straddling 1 January 2018 to split their period of account and apportion all relevant amounts for CIR purposes between the pre- and post- 1 January 2018 periods (in the same way as groups would currently have to do for periods straddling the 1 April 2017 start date), we understand this is not intended.  (I.e. we understand the requirement to split the period on 1 January 2018 will only apply to the extent necessary to apply the new rules that will apply from 1 January 2018.)  
  • CIR grouping – held for sale assets – The announced amendment of the grouping rules to “align them with accounting principles” turned out to be an amendment treating 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). 
  • CIR grouping – investment managers – A new rule will provide that where an entity (“S”) is a member of a CIR group as a result of a group member managing S (and holding interests in S) as part of its an investment management business, and “the management of S is not coordinated to any extent with the management by any person of any other entity”, subsidiaries of S are not to be regarded as members of the worldwide group.   (On its face, therefore, it seems that “S” itself would still be part of the group, with only its subsidiaries being excluded, although the Explanatory Notes would seem to suggest S itself is also intended to be excluded.)
  • Public infrastructure exemption (“PIE”) – “fully taxed” - The announced amendment relaxing the “fully taxed in the UK” and “balance sheet tests” where companies have “insignificant” income outside the scope of UK tax will only be available for non-resident companies.  (The basic wording of the “fully taxed” test will also be tweaked so that “every source of income that the company has at any time in the accounting period is within the charge to corporation tax”, rather than “every activity…”.)
  • PIE – transfer of QIC business – The new rule here (announced at the Budget) will allow a qualifying infrastructure company (“QIC”) to transfer the whole or part of its business to a third party without the purchaser being treated as making a QIC election.
  • PIE – de minimis – The Budget Notice stated that an infrastructure group’s ability to access the de minimis provisions would be limited in certain circumstances.  The draft legislation now clarifies that the existing rule allowing an infrastructure group’s ability to calculate its interest capacity under the de minimis provisions (where the application of the PIE rules would otherwise cause a larger CIR disallowance than would otherwise apply) will be amended to only allow this treatment where any QICs in the group do not receive any significant tax-interest amounts from QICs outside of the group that are related parties.  In terms of additional changes not previously announced at the Budget.
  • Alignment of tax-interest and group-interest – Changes will be made to ensure that (i) expenses relating to loan relationship related transactions and (ii) finance income/charges from transitions similar to debt factoring will be included in calculating group-interest as well as tax-interest.  
  • Forfeiture of disallowed interest – Where an investment company with carried forward disallowed interest ceases to carry on its investment business in a period, it will now be able to carry forward the disallowed interest to that period (but not subsequent periods).  
  • Admin – time limit for amending a full IRR – A new rule will allow a group that has submitted a full IRR (for a period when it is not subject to any CIR restriction) to file a revised return up to 60 months after the end of the PoA, thus aligning the time limit with that for “upgrading” an abbreviated return for a full IRR.
  • PIE – JVs – The conditions for the PIE joint venture provisions to apply to a company will be amended to prevent a JV company being part of the same group as one of the investors in the company.
  • Designated currency election – The old cross reference in section 9A CTA 2010 to the worldwide debt cap grouping rules will be amended to cross-refer to the CIR grouping rules.

Autumn Budget 2017: Amendments to CIR Legislation

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.

Updated Draft HMRC Guidance on the Corporate Interest Restriction - 7 August 2017

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:

  • The application of the fair value accounting election to insurance companies, following the changes made in the revised draft legislation issued on 13th July 2017 (CFM95640 & CFM97525);
  • The treatment of hire purchase agreements and conditional sale agreements (confirming that where these are accounted for as finance leases, the implicit financing cost would be included in tax-interest) (CFM95660);
  • The exclusion of certain credits and debits in respect of intangible fixed assets in calculating tax-EBITDA (CFM95805);
  • The treatment of capitalised interest (confirming how this is treated for purposes of calculating a group’s net-group interest expense (“NGIE”) ) (CFM95920);
  • The exclusion of expenses arising from results-dependent securities in calculating a group’s qualifying net-group interest expense (“QNGIE”) (confirming that a purposive approach should be adopted and that there is no general exclusion for amounts paid to another company within the charge to corporation tax) (CFM96040);
  • The new exclusion from related party loan status for “ordinary independent finance arrangements” by banks and others (CFM96320);
  • The exclusion from related party loan status for loans made by public bodies (including a new example of how this works) (CFM96330); 
  • The Group-EBITDA (chargeable gains) election which allows the calculation of Group-EBITDA to be aligned more closely with the UK tax rules as regards disposals of relevant assets (CFM96620);
  • The interest alternative (alternative calculation) election which allows the calculation of Group-Interest and Group-EBITDA to be aligned more closely with the UK tax rules as regards (i) capitalised interest for GAAP-taxable amounts; (ii) employers' pension contributions; (iii) employee share acquisitions; and (iv) changes in accounting policy (CFM96630 to CFM96660)
  • Joint ventures, in particular, their CIR treatment when no elections apply and the impact of making (i) an interest allowance (non-consolidated investment) election; (ii) an interest allowance (consolidated partnerships) election; (iii) a group ratio (blended) election; or (iv) a public infrastructure election where the JV is a Qualifying Investment Company (CFM96700 to CFM 96910);
  • Various points relating to the public infrastructure election, including (i) accounting for service concession arrangements under FRS 102 and IFRIC 12; and (ii) cases where a company has assets of insignificant value (CFM97210).  The guidance formerly at CFM97300 to CFM97320 regarding the exemption for interest payable to third parties as a result of the PIE applying appears to have been deleted.  We will seek to confirm with HMRC whether this has been deleted in error;
  • Various points relating to banking groups, including confirmation that (i) where a group initially files abbreviated returns but then decides to file a full return for the relevant periods (within 5 years) in order to carry forward surplus interest allowance, a “reasonable estimate of figures prepared on a prudent basis should be satisfactory for this” and (ii) where a banking group’s tax-interest income exceeds tax-interest expense by some margin, detailed calculations would not normally be necessary (CFM97505 & CFM97515);
  • The treatment of Real Estate Investment Trusts (REITs) under the CIR rules (CFM97710 – CFM97760);
  • The treatment of leasing transactions under the CIR rules, including specific points relating to the treatment of (i) finance leases vs operating leases and (ii) long funding leases vs non-long funding leases (CFM97800 – CFM97840);
  • The special rules relating to tonnage tax and oil & gas (CFM97900 – CFM97920);
  • How certain aspects of the exemption from the regime anti-avoidance rule (RAAR) for commercial restructuring arrangements that are designed to secure the benefit of a relief expressly conferred by the CIR rules should be interpreted, including various new examples  of scenarios that HMRC say would or would not be covered by the exemption (CFM98020);
  • The carry forward rules relating to carry forward of (i) disallowed interest, (ii) unused interest allowance and (iii) excess debt cap , including several detailed worked examples (CFM98210 – CFM98250);
  • The circumstances in which a group will need to appoint a reporting company and file an interest restriction return (confirming that groups whose aggregate net tax-interest expense falls below the de minimis limit of £2m per annum will not normally be required to do this in practice) (CFM98440);
  • The extended 5 year time limit for filing a full interest restriction return where an abbreviated return has previously been filed (CFM98530);
  • The rules providing for when amounts stated in an interest restriction return will be treated as conclusively determined (CFM98625);
  • Specific administrative rules relating to UK group companies, including (i) consenting vs non-consenting companies, (ii) which items of income are to be left out of account following an allocated disallowance; and (iii) carry forward and reactivation of disallowed interest (CFM98630 – CFM98700);
  • The enquiry procedure for when HMRC enquires into an interest restriction return (CFM98720 – CFM 98880);
  • The rules relating to record retention and information powers (CFM98890 – CFM98970);
  • Penalties for various failures to comply with the CIR rules (CFM98980 – CFM99120).

Various other amendments have been made to reflect changes made in the revised draft legislation published on 13th July 2017.

Corporate Interest Restriction – Update regarding legislation and start date

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. 

In particular:

  • Related party rules - Amounts arising from related party loans are excluded in calculating a group’s “qualifying net group interest expense” (“QNGIE”), which forms the basis for the group ratio debt cap and the numerator of the group ratio percentage. There are detailed rules outlining when a lender and borrower will be treated as “related” for these purposes.  Several amendments have been made to these rules, including: 
    • One of the 3 main bases on which parties can be treated as “related” is if a “participation test” is met.  A special carve-out has been included from the “participation test” that can deem a securitisation company and any settlor of a trust holding the securitisation company not to be related parties
    • Another basis on which parties can be treated as “related” is if a “25% investment test” is met.  In determining whether a person would receive 25% or more of disposal proceeds / income distributions / assets on a winding-up, “receipt” includes “indirect receipt”.  Additional wording has been included clarifying that where a person (A) directly receives any amount and another person (B) directly or indirectly holds a percentage of the equity in A, this qualifies as an indirect receipt by B.  However, this provision will not result in a person having a 25% investment in another person merely as a result of their being parties to a normal commercial loan.
    • For the purpose of applying the 25% investment test, rights of connected persons are required to be amalgamated  A specific exclusion has been added providing that persons are not to be regarded as “connected” for this purpose merely as a result of being parties to a normal commercial loan.
    • The related party rules also contain (i) certain exceptions that can treat loans are not being related party loans where they otherwise would be and (ii) certain rules that can deem loans to be related party loans where they otherwise would not be.  Previously, the latter deeming rules took priority over the former exceptions where both applied.  But this position has now been reversed, so that the exceptions will take priority. (The previous position was causing some issues in corporate rescue and syndicated debt scenarios, where it seemed clear that the loans were not intended, as a matter of policy, to be treated as related party loans, but the deeming rules arguably had this effect.)
    • One of these exceptions formerly applied to certain loans made by banks where the bank could not have been reasonably aware of the facts that led to it being treated as a related party of the borrower. This provision has now been expanded so as to potentially be available in the case of non-bank lenders.  The revised exception applies where the lender is not party to the loan as a result of, or in any way connected with, any of the circumstances which make the two parties related. This could be relevant where, for example, rights of another person (e.g. connected persons, as mentioned above) are attributed to the lender under the CIR rules and the lender had no knowledge of that the other person held those rights.
  • Public infrastructure exemption (“PIE”) – A few changes have been made (i) slightly expanding the circumstances in which grandfathering of pre-13 May 2016 related party loans can be removed due to later changes in circumstances, (ii) slightly broadening the rules allowing decommissioning activities to qualify for exemption and (iii) clarifying that where an exception applies allowing a group to access a £2m p/a de minimis allowance notwithstanding the application of the PIE, the remaining rules relating to the PIE are “switched off” when performing the group’s CIR calculations.
  • Fair valued creditor relationships – This measure allows insurers and other entities to elect for tax-interest in respect of creditor loan relationships held at fair value to be computed on an amortised cost basis of accounting for tax purposes.  The issues of concern to insurers with the previous drafting have largely been dealt with. The tax-interest amount is now calculated based on the interest accrued in the company’s records rather than an amount calculated by excluding premiums, discounts, etc. from the accounting credit.  In relation to interest originating from collective investments, interest is the amount that can reasonably be regarded as equating to interest. Certain provisions tracking the status of elected in or not elected where an insurance business transfer is made have been removed.  The rules now expressly include loans held in connection with the regulation of underwriting business carried on by members of Lloyd’s.
  • Hybrids – A new provision has been added dealing with cases where tax-interest expenses are disallowed but subsequently reactivated under other tax rules (such as the hybrid rules), requiring the reactivated amount to be treated as a tax-interest expense.
  • Blended group ratio election – This election allows a worldwide group to access a higher group ratio percentage, based on the blended group ratios of its investors.  Where the election is made, it also results in the group’s QNGIE being substituted with the “blended net group-interest expense”.  The way that the latter amount is calculated has been amended so that, in cases where an investor’s group ratio is percentage (proportionately) substituted for the group’s group ratio percentage, it is limited to so much of the investor’s QNGIE as relates to loans or other financial arrangements that are used to fund (directly or indirectly) loans to, or other financial arrangements with, members of the investee group.
  • Pension contributions - A new provision has been introduced clarifying that amounts payable or receivable under a “pension scheme” (as defined in section 150(1) Finance Act 2004) cannot qualify as “relevant expense/income amounts” that are taken into account in calculating a group’s “net group interest expense” (“NGIE”).
  • Employee share schemes – Where an alternative calculation election is made, the way that certain amounts (including in respect of employee share schemes) are calculated for CIR purposes can be aligned with their recognition for UK tax purposes.  For this purpose, the definition of “employee share acquisition arrangements” has been tweaked to refer to any arrangements the corporation tax treatment of which is determined under Part 11 or 12 CTA 2009 (as opposed to arrangements in respect of which deductions are allowed, or amounts treated as received under Part 11 or relief is given under Part 12).
  • Capitalised interest - Additional wording has been included confirming that the amounts that need to be added back to the group PBT (in calculating a group’s Group EBITDA) in respect of the depreciation / amortisation / impairment of “releant assets” includes depreciation / amortisation / impairment of any “relevant expense amounts” (i.e. interest-like amounts) previously capitalised into the carrying value of the relevant assets.  (Such amounts are not included in calculating a group’s NGIE, so need to be added back at this stage instead.)
  • Compliance - A new provision has been added extending the time limit for the appointment of a reporting company in the first year of application of the CIR rules to 31 March 2018 and extending the filing deadline for the interest restriction return in the first year to 30 June 2018.

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:

  • There is still no relieving provision preventing a CIR group from losing its carried forward interest allowance merely because it inserts a new top company (whose share register mirrors that of the old top company).
  • There is still no specific provision confirming to what extent fees incurred in connection with finance leases qualify as “tax-interest”.
  • There is still some uncertainty regarding the way that some of the rules relating to capitalised interest apply in cases where interest has been capitalised into trading stock

Corporate Interest Restriction - Your questions answered

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.

Webinar questions

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”. 

Related Parties

Q11. How do you define related party for interest purposes? 

A. Parties will be related if any one of three conditions is met:

  • The consolidation condition
  • The participation condition
  • The 25% investment condition 

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.

Joint Ventures

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:

  1. Non-trading loan relationship debits
  2. Non-trading derivative contract debits
  3. Trading loan relationship debits
  4. Trading derivative contract debits
  5. Other tax-interest debits


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.

If you have any questions or would like to discuss the topic further, please contact one of the webinar speakers - Rob Lant, Daniel Head.

Finance Bill 2017 - Update

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.  

For more information on the CIR legislation and how it impacts your company, please get in touch with your usual KPMG contact or Daniel Head and Kashif Javed

Corporate Interest Restriction draft guidance - 31 March 2017

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.”

Changes to the draft CIR rules published in FB 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.

If you would like to further discuss the changes made by FB 2017, or the impact of the CIR on your group more generally, please contact Daniel Head or Kashif Javed.


Tonnage Tax and the CIR regime - 14 March 2017

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).

For further information, please contact Michael Everett or Daniel Head.


The impact of the CIR regime on the Infrastructure sector - March 2017

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.

Ongoing consultation on the evolving CIR legislation - March 2017

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:

  • The meaning of a 25% investor (s450(2)(b)):  Our reading of the legislation as currently drafted is that the definition of a 25% investor seems unduly broad, as it would seem that an otherwise unrelated party who lends under the terms of a loan which is a normal commercial loan could be a “related party” because they have a priority right to assets on a winding up.  We have therefore raised this with HMRC and they have confirmed that this is a point that they are considering in more detail (and indeed have received similar representations on).  
  • Results dependent securities:  We have also highlighted to HMRC a concern related to the proposal to exclude the finance charge on results dependant securities from group interest (s410(3)(b)).  Again, this is a point which has been raised by other stakeholders, and we understand that the legislation is to be amended so that securities will not be results dependant where the interest increases where results deteriorate (and vice versa).  
  • The PBIE:  KPMG’s Infrastructure Tax team, headed by Naz Klendjian, has managed the process by which The Infrastructure Forum (TIF) has collated representations from within the infrastructure community, we are engaging regularly with HMRC and Treasury  around the consequences of the new legislation for infrastructure investment in the UK.  We have a deep understanding of the new rules and are already advising clients on details, such as the new ‘comparative debt test’.

For more information on the CIR, or if you have any specific points or concerns you would like to discuss with us and/or HMRC, please do get in touch with Daniel Head or Kash Javed.

HMRC publish cash-pooling guidance - 10 February 2017

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

  • setting interest rates, 
  • the consequences of netting balances, 
  • the possible long-term debt implications for cash pools;
  • withholding tax issues associated with cash pools. 

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.

Tax deductibility of corporate interest expense – updated draft legislation - 30 January 2017

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:

  • Definitions needed for the calculation of the optional Group Ratio Rule. This includes details of optional elections that can be made to more closely align the calculation of ‘Group EBITDA’ with UK tax principles;
  • Rules defining ‘related parties’;
  • Final detail of the optional rules that qualifying companies investing in public infrastructure may choose to apply on an elective basis – the Public Benefit Infrastructure Exemption (PBIE); 
  • Detailed rules applying to particular issues and industries, such as REITs, companies operating in the oil and gas ring fence, leasing companies, and companies using Patent Box and other tax incentives; and 
  • Optional ‘blended’ group ratio rules for groups with one or more related party investors. 

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: 

  • Amendments to the Public Infrastructure rules – the key change being that this now requires a ‘prospective’ election that has effect for a minimum of five years;
  • Inclusion of creative tax reliefs into the list of tax reliefs to be disregarded in calculating tax-EBITDA. Previously this had been limited to R&D reliefs only;
  • Confirmation that there will be no rules to specify how any restriction to interest expense should be allocated to profits that are subject to the Northern Ireland CT rate; and
  • The disapplication of the regime-wide anti-avoidance rule to certain ‘commercial restructuring arrangements’.

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. 

BEPS Action 4 Tax Diary Update – 10 January 2017

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.

Webinar questions

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.

UK Interest deductibility regime: draft legislation published - 9 December 2016

On Monday 5 December, the Government published draft legislation for the proposed new interest deductibility regime.

This is broadly in line with the proposals set out during the consultation held earlier this year, and the draft legislation sets out the detail for the key principles of the new regime (such as the Fixed Rate Ratio). It also has extensive detail on the administration of the new rules for corporates.  There are however a number of outstanding areas, most notably, definitions relating to the Group Ratio Rule and the revised “Public Benefit Infrastructure Exemption” (PBIE).  The Government intends to publish the remaining clauses by the end of January 2017.

Our commentary on the draft legislation is now available on our website, here

Alongside this, a response to the consultation was also published, which set out a summary of the responses received from stakeholders during the Summer 2016 consultation, and the Government’s response.  In the absence of complete draft legislation, this document does also provide some helpful indicators as to what we should expect in relation to the remaining clauses – for example, in relation to the PBIE.  The consultation response document suggests that the PBIE will be broader in scope than previously proposed, both in terms of the sectors and activities it should cover and in the types of interest (there is expected to be some changes to the definition of related party interest). 

A more detailed note on the implications for investment into the Infrastructure Sector can be found here

Finally, a reminder that we will be holding a webinar on Tuesday 13 December to run through the draft legislation in more detail – please click here to register.  

385 Regulations: new rules in relation to the US tax treatment of certain related party debt - 15 November 2016

With everyone talking about the US Presidential election this week, we thought we’d keep this post topical with a brief note about last month’s release of finalised regulations by the US Treasury Department that impact the treatment of certain related party debt (the “385 Regulations”). Both the journey to this point and the 385 Regulations themselves are far from straight-forward, and so we will not attempt to provide a detailed examination of the scope and implications; instead we will focus on the headline points and let you know where you can find out more information.

The Headlines

  • The 385 Regulations were released on 13 October 2016, with a published date of 21 October 2016 (the published date is important for determining the effective date of the related-party debt recast rules).
  • The 385 Regulations set out certain documentation requirements that must be satisfied in order for certain related party debt to continue to be treated as debt for US tax purposes (the “Documentation Rule”).
  • The 385 Regulations also set out other circumstances in which certain related party debt may be treated as equity for US tax purposes, including in the context of debt issued as part of a M&A transaction (the “Recast Rule”).


Proposed Regulations were originally issued in April 2016. In the six months between proposal and finalisation, the Proposed Regulations were subject to widespread criticism by business and tax professionals. The US Treasury and the IRS have responded by making significant changes to the Proposed Regulations that significantly reduced the impact of the new rules on US parented multinational groups, such as excluding foreign company issued debt from the scope of the 385 Regulations. Nonetheless, the final 385 Regulations introduce new compliance burdens and potential changes in the treatment of certain related party debt that will largely apply to non-US parented multinational groups.


The 385 Regulations generally apply to certain related party debt due from domestic (i.e. US) corporations and certain partnerships, unless both borrower and lender are within the same US consolidated tax group. In general only debt between a borrow and lender within the same “expanded group” (in which there is a common parent with direct or indirect ownership of 80% of the vote or value of each) is subject to the 385 Regulations.

Documentation requirements

Subject to certain exceptions, the Documentation Rule imposes contemporaneous documentation requirements on certain related party loans, including written documentation of four indebtedness factors. Failure to meet such documentation requirements will generally result in the reclassification of the debt as equity for US tax purposes. The Documentation Rule applies only to debt issued on or after 01 January 2018.

The definition of “contemporaneous” has been relaxed in the final 385 Regulations as compared to the Proposed Regulations, but still imposes a significant administrative burden on borrowers. Concerns have also been raised in respect of certain types of related party funding, for example, the impact on cash pooling and revolving credit arrangements.

Recast Rule

The Recast Rule features two basic operating regimes that reclassify certain US company issued debt to members of the same expanded group as equity – the “General Recast Rule” and the “Funding Rule”.

The “General Recast Rule” targets three basic types of “suspect transactions” – (1) dividends of self-created instruments of indebtedness, (2) purchase of expanded group member stock in exchange for debt of the purchaser, and (3) debt instruments issued as “boot” in an inter-expanded group reorganisation. Subject to certain exceptions, debt to which the 385 Regulations apply will be recharacterized as stock for US tax purposes if issued in one of these suspect transactions.

The “Funding Rule” generally applies to recharacterize debt as equity when the debt is issued in exchange for property (e.g. cash) and the issuer engages in certain identified transactions (“funded transactions”) within a 72-month time-frame (36 months before until 36 months after the date of the funded transaction), unless certain exceptions apply. “Funded transactions could include transactions such as dividend distributions or the purchase of expanded group member stock.

In general, the Recast Rule only applies to debt issued on or after 04 April 2016.

The impact for M&A transactions

While the introduction of new and expanded exceptions have limited the scope of the final 385 Regulations as compared to the earlier Proposed Regulations, the US tax consequences of the final 385 Regulations remain substantial for non-US parented multinational groups. In particular, the introduction of the Funding Rule will be especially relevant for related party debt-funded US sub-group companies engaging in M&A transactions, and close monitoring of the ongoing activities of the US company’s activities will be required to avoid unintended recharacterization of certain debt as equity.

What to do now

If you consider that these new 385 Regulations could apply to your US sub-group, we recommend that you take action now to identify the (potential) impact of the Documentation and Recast Rules, including compiling and maintaining a complete inventory of outstanding intragroup loans between US and non-US expanded group members. Consultation with your tax adviser before engaging in transactions involving related party debt-funded US sub-group companies is also recommended to help understand the recharacterization risk.

KPMG Global Webcast

If you would like to hear more about the Regulations, KPMG Global will be holding a webcast on 30 November 2016 – please click here to register.

For further information and assistance

If you would like further, more detailed information on the 385 Regulations, please visit our KPMG US website here. If you would like to discuss the new 385 Regulations in more detail, our colleagues on our US Tax Desk would be happy to assist – please contact Fred Gander (, 020 7311 2046) or your usual KPMG contact.

The new regime: what to look out for in the coming weeks – 05 October 2016

With summer over and an Autumn Statement date announced, we thought now would be a good time for a brief update on what to look out for in the coming weeks in relation to the UK’s new interest deductibility regime.

Whilst there had been speculation by some that the Brexit vote may have forced a delay to the commencement date of the regime, it is our understanding that this will not be the case. 

So, with 1 April 2017 still very much the target, here is a summary of our understanding key dates ahead:

  • Now: We understand that HMRC received a large number of responses to their May 2016 consultation, and they are currently busy working through these. As indicated at the time of the consultation, they have been particularly interested in understanding the practical implications of the proposals on business. We predict that if there are any changes to the outline regime, they will be to address these unforeseen practical difficulties in applying the new rules. For example, one of the points that we raised in our KPMG representation was the issues caused by the use of different definitions of EBITDA for the fixed ratio rule vs the group ratio rule, and it will be interesting to see if this is something that is addressed in the draft legislation. 
  • 23 November, Autumn Statement:  Expect to see draft legislation on or shortly after the Autumn Statement date (and no later than 5 December 2016, when draft
    legislation for Finance Bill 2017 more generally will be published)
  • Early 2017:  We anticipate that the Government will hold a further consultation period on the draft legislation.  Any key dates for comments should be highlighted at the time of the publication of the draft clauses.
  • 1 April 2017: Commencement date for the new regime

A few additional points to note in relation to the new regime:

  • It remains the case that the specific issues for the banking and insurance industry are being considered separately, but the timetable runs in parallel.
  • We understand that work on the definitions for the Public Benefit Project Exclusion continues;
  • Finally, the new regime will not signal the end for Advance Thin Cap Agreements (ATCAs) – as previously commented, the arm’s length test will still apply to debt and there will therefore still be an opportunity to agree an ATCA with HMRC in the appropriate circumstances.

The best of the rest – further answers to questions asked during our BEPS Action 4 webinar (part 2) – 10 August 2016

Q4: If a Group applies the GRR, how is the resultant interest deduction allocated between UK group companies? Is there flexibility? 

A4: There is flexibility on where the interest deductions can be allocated. However, the interest deductions can only be allocated to a company up to its net tax-interest expense. As per the previous question, other legislation regarding interest limitation will also need to be considered.

Q5: Is it expected that a taxpayer could carry forward excess capacity that arises prior to 1 April 2017 for three years?  Or will this apply only to capacity arising from implementation of the new rules?

A5: The carry forward of excess capacity will only apply to capacity arising from 1 April 2017 and the commencement of the new rules.

Q6: Where a company has interest expense restricted under the modified debt cap rule, will there be provision to carry forward the unused interest expense, similar to a restriction under the FRR or GRR?

A6: Yes, the mechanics of the modified debt cap rule will be fully incorporated with the main rules, so an amount of restricted interest would be available to be carried forward and used in a further period where there is sufficient interest capacity.

Q7: What, if any, interest restrictions do we need to apply to overseas businesses?  Is this dependent on the introduction of OECD rules for individual countries?

A7: The interest deductions that can be taken in other countries will be dependent on the specific rules in that country. The UK is expected to be one of the first countries to implement new rules arising from the recommendations of Action 4 and so it is likely that interest deductions in other countries will not be subject to new legislation at the same time as the UK.

Q8: Which groups is the Public Benefit Project Exclusion (‘PBPE’) expected to apply to?

A8: The PBPE is expected to apply to groups that provide public benefit services where there is no risk of BEPS. Groups electing to use the PBPE must identify eligible projects, the tax-interest expense and tax EBITDA of which would then be excluded from the interest restriction calculation. 

The definition of an eligible project is fairly restrictive:

• The project is to provide public benefit services i.e. services which it is government policy to provide for the benefit of the public.

• A public body contractually obliges the operator to provide the services (directly or under licence).

• The project involves the provision, or upgrade, maintenance and operation of infrastructure on a long term basis (at least 10 years), or on a short term basis that the operator/ public body expects to continue indefinitely. 

• All project revenues are subject to UK tax.

• At least 80% of the gross revenue of the project is expected to arise from the provision of public benefit services.

Q9: Is the PBPE optional?  

A9: Yes, the PBPE is optional and a group must elect to apply it. 

The best of the rest – further answers to questions asked during our BEPS Action 4 webinar (part 1) – 4 August 2016

Q1: How do the proposed rules interact with other interest limitation rules e.g. anti-hybrid, transfer pricing?

A1: Under the Fixed Ratio Rule (‘FRR’) and Group Ratio Rule (‘GRR’), tax-interest will be limited to a percentage of tax-EBITDA. The amounts that are included within tax-interest are those that are taxable/ deductible after the application of other interest limitation rules including transfer pricing, unallowable purpose, anti-hybrid, group mismatch and distribution rules.

Q2: Do we have to worry about past interest deductions or just consider amounts post the proposed date? 

A2: Under the current proposal, the new rules will be introduced on 1 April 2017 and will apply to all amounts of interest and other financing costs that arise after this date e.g. the rules will apply on the basis that groups prepare accounts for two notional periods of account, one ending 31 March 2017, the second starting on 1 April 2017. There are no current plans to retrospectively apply these rules to periods pre 1 April 2017.

However, a key concern is regarding the treatment of late paid interest which carries forward in to the new regime. The current proposal is that ‘late interest’ paid on or after 1 April will fall within the scope of the interest restriction rules.

Q3: Under FRR what happens if a company has made nil profit? No interest deduction allowed until revenues are generated?

A3: As set out in the response to Question 1, these new proposed rules will apply after the application of other interest limitation rules and therefore, for a loss making/ nil revenue entity, the arm’s length test may already act to restrict the deduction of interest for that entity before the application of the new rules is considered.

However, if, under the existing interest limitation rules, a potential deduction may be taken for tax-expense, then as the proposed rules will apply on a UK group by group basis rather than a company by company basis, groups can choose how to allocate any interest restriction between the individual companies. Again this allocation is subject to certain limitations.

Please note that all groups are entitled to deduct up to £2 million of net tax-interest expense per year (provided it can be supported as arm’s length) and this overrides the modified debt cap rule. 

Consider the position if there is a loss making entity within a positive EBITDA Group. The Group has analysed the other interest limitation rules to determine net tax-interest expense for the Group, and under the FRR and GRR has determined the quantum of this net tax-interest amount that the UK Group can deduct (taking into consideration the £2 million de minimis). This amount can then be allocated between the UK Group entities, however the arm’s length test etc must again be considered in allocating this to the loss making entity.

Now consider loss making entities in a negative EBITDA Group. As before, the Group has analysed the other interest limitation rules to determine net tax-interest expense for the Group. Under the FRR no deduction will be allowed, however under the GRR, the interest deduction will be restricted to the net qualifying interest expense of the Group (i.e. the actual third party interest expense of the Group) subject to consideration of the £2 million de minimis. Again, the arm’s length test must be considered in allocating this interest deduction to loss making entities within the Group.

The consultation document has raised that in certain circumstances, a reduced EBITDA (as a result of loss makers in the group), or the restriction of net qualifying interest expense (for a negative EBITDA group) may result in interest capacity that can sometimes be excessive compared to UK activity. As such, there may be additional rules put in place to cap the level of deductible interest over and above the restrictions set out above, but these are currently under discussion.

Specific definitions for the application of BEPS Action 4 – questions from our recent BEPS Action 4 webinar – 27 July 2016

During our recent webinar on 6 July regarding the UK’s proposed introduction of a new interest deductibility regime, a number of questions were raised regarding the definitions of key terms that will be used in the calculation of deductible interest.

We consider that the responses may be of use to a wider audience and so have set these questions out below with our answers.

Q1: What is the definition of the UK Group e.g. does it also include non-UK incorporated but UK tax resident entities?

A1: The proposed definition of the UK Group includes all companies in the group that are within the charge to UK corporation tax, so this includes all UK tax resident entities regardless of their place of incorporation.

Q2: What is the definition of Group EBITDA e.g. would exceptionals be included?

A2: For the purposes of calculating Group EBITDA for the Group Ratio Rule (‘GRR’), the method set out in the consultation document is to add back the “Total Group Interest” and group depreciation and amortisation to a group’s PBT. 

This means that there is no add back for non-recurring expense items, and therefore, under the proposed rules, exceptionals would appear to be included in Group EBITDA. This is an area we will seek clarity on through the consultation process, although we expect that this will not be amended as the carry forward rules are designed to accommodate for fluctuations in EBITDA.

Q3: When calculating tax EBITDA for the UK Group, can you include interest income which is being taxed through the CFC finance company regime?

A3: No. HMRC and HMT have put forward the position that as the CFC rules are, in effect, anti-avoidance rules, they are not strictly part of the UK corporation tax charge.  Therefore, under the proposals, will not be included in tax EBITDA (please see section 8.58 of the consultation document).

Q4: Do the Fixed Ratio Rule (‘FRR’) and GRR use net or gross interest expense?

A4: The rules apply to ‘net’ tax interest expense i.e. the financing expense amount less the financing income amount. 

Tax interest is defined by reference to tax concepts and will apply to interest on all forms of debt, payments economically equivalent to interest, and expenses incurred in connection with the raising of finance. Please note that ‘Tax interest’ is not the same as the P&L interest as the amounts within tax interest are those that are taxable or deductible after the application of existing UK rules, e.g. the current arm’s length test, unallowable purpose rules etc. 

Q5: What is ‘unused interest capacity’?

A5: Unused interest capacity is the ‘spare capacity’ of the UK Group and references where a UK group’s interest capacity under the Action 4 tests e.g. 30% of tax EBITDA, is greater than its actual net tax-interest. 

This is calculated by subtracting the net tax-interest from the interest limit and the spare capacity can be carried forward for up to three years. 

For example, a UK Group has EBITDA of £100, and, under the arm’s length test and FRR, is able to deduct net tax interest of £30. However, the UK Group only has net tax interest of £20. Under the proposed carry forward rules, the UK Group can carry £10 of spare capacity forward three years. 

In the next year, the UK Group has EBITDA of £80, and, under the arm’s length test and FRR, is able to deduct net tax interest of £24, however the net tax interest is now £30. Under the proposed rules the Group can use £6 of the carried forward spare capacity to deduct the full £30 in the second year and carry forward £4 of spare capacity. 

Q6: Is the deductibility of interest limited to the higher or lower of the amount allowed under the GRR and the modified debt cap rule?

A6: The deductibility of interest is limited to the lower of the amount allowed under the GRR and the modified debt cap rule. However please note that the FRR will apply, unless the Group applies to use the GRR.

For further information please contact: 


Daniel Head

Partner, Corporate Tax 



Robin Walduck

Partner, B2C Tax



Margaret Stephens

Partner, Corporate Services



Naz Klendjian

Partner, Tax



Sarah Beeraje

Senior Manager, B2C Tax Corporate



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