This is the seventh of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules, which have been removed from Finance Bill 2017 following the announcement of the general election. Based upon the HMRC messaging that “There has been no policy change and the government has announced it will legislate for the provisions at the earliest opportunity in the next Parliament” we would recommend that groups assume that the rules will apply from 1 April 2017 until an announcement is made by Ministers. The CIR rules operate by reference to the ‘worldwide group’. In particular, as discussed in previous articles, the total disallowed amount is computed on a group-wide basis and is then allocated between UK group companies. It is, therefore, vital to establish the ultimate parent and which entities comprise the worldwide group.
Generally speaking, a worldwide group will consist of all entities that would form part of a group applying International Accounting Standards (IAS). Broadly, this is a parent and its consolidated subsidiaries, but subject to certain specific overrides.
- An IAS parent will only be treated as the ultimate parent if it is a ‘relevant entity’. This is defined as: (i) a company; or (ii) an entity whose shares, or other interests, are listed on a recognised stock exchange and are sufficiently widely held (i.e. no participator holds more than 10 percent by value). For example, some very large groups are headed by partnerships and interests in those partnerships are publicly held and traded. The CIR grouping rules therefore ensure that the partnership is capable of being the ultimate parent of a worldwide group if it meets the relevant conditions above.
- An IAS parent will not be treated as the ultimate parent if it is itself a consolidated subsidiary of another entity that is itself an ultimate parent.
- A subsidiary under IAS will not qualify as a consolidated subsidiary if the investment in that company is measured at fair value under IAS (as opposed to having its results consolidated on a line-by-line basis).
- There are special rules deeming a single worldwide group to exist where parent entities are ‘stapled’ or treated as a single economic entity by reason of a business combination under IAS.
- There is a special exception preventing portfolio investments of insurance entities from being consolidated subsidiaries in certain cases.
- Non-IAS adopters - Even if the group does not actually adopt IAS, it will be necessary to apply the relevant IAS definitions to determine the worldwide group. Adjustments will be required to non-IAS group accounts to include and exclude entities to reflect the IAS rules.
- Non-corporate entities – A worldwide group may include non-corporate entities, the results of which may be taken into account in certain group-wide computations.
- Comparison with other tax grouping rules – The worldwide group concept is much wider than other tax grouping tests, such as those for group relief and the new loss restriction rules.
- Comparison with worldwide debt cap (WWDC) group concept – Although the CIR grouping test is similar to the WWDC grouping test (which is also based on IAS), unlike the WWDC test: (i) it is not limited to large groups; (ii) it only extends to consolidated subsidiaries (and not fair valued subsidiaries); and (iii) it includes companies falling within the special tax regimes for securitisation companies. Moreover, the scope of the CIR regime is wider in that it will restrict the interest expenses of any UK companies within the worldwide group whereas the WWDC only applies to restrict interest expenses of UK companies that meet one or more 75 percent tests (share capital, profits, assets etc.).
- Implications from identifying the group – If a particular sub-group forms its own self-standing worldwide group for CIR purposes, it will compute its interest disallowance by reference to its own interest and EBITDA metrics and will have sole autonomy over allocating any resulting disallowances or reactivations of interest within its sub-group. By contrast, if the sub-group forms part of a wider worldwide group, any disallowances or reactivations it suffers/enjoys may be determined by a reporting company elsewhere in the wider group.
- Elections which amend the group - Although the basic CIR rules operate by reference to the results of members of the worldwide group, the rules also contain various elections that can involve:
- amounts in respect of non-group entities (e.g. a joint venture) being included in the group’s calculations; or
- amounts in respect of certain group entities (e.g. partnerships) being excluded from the group’s calculations.
- Related party rules – As discussed in the fourth article in this series, interest-like expenses payable to a related party are not included in calculating the group ratio percentage and debt cap. It is worth noting that the concept of related party is much wider than the grouping test.
This is the seventh in our series of articles on the detail of the new corporate interest restriction regime. Our previous articles covered:
For further information please contact: