This is the eighth 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’, and last week we looked at how to identify this group. This week, we take a look at other matters linked to the role of the group in the CIR calculations.
Determining the period of account
The CIR disallowance of interest-like expenses is tested by reference to the group’s period of account. Where an ultimate parent of a CIR group draws up consolidated financial statements for the worldwide group, in most cases, the period of account to be used will be the period covered by such accounts, unless they are drawn up for a period exceeding 18 months or are drawn up more than 30 months after the start of the period.
Where the ultimate parent does not draw up consolidated financial statements for the worldwide group (or draws up statements that do not meet the above requirements), a default period of account is prescribed by the legislation, but the ultimate parent may be able to elect for a different period of account to be used.
Determining what financial statements to use
Where the CIR rules use amounts determined at the group level, the basic rule is to extract these from the consolidated financial statements of the ultimate parent. This is subject to the following.
- Which generally accepted accounting practice (GAAP) is acceptable?
Financial statements will only be ‘acceptable’ if they are drawn up in accordance with (i) IAS, (ii) UK GAAP, (iii) GAAP in Canada, China, India, Japan, South Korea or the USA or (iv) a methodology producing results not materially different from those under IAS. If not, IAS-compliant financial statements will be deemed to be drawn up;
- What if the wrong entities are consolidated? If such financial statements consolidate results of entities that would not be consolidated under IAS, or fail to consolidate results of entities that would be consolidated under IAS, they will need to be adjusted to exclude/include such entities; and
- What if there are no consolidated accounts? Where the ultimate parent does not prepare consolidated accounts for the worldwide group, IAS-compliant financial statements will need to be drawn up specially in order to perform the CIR calculations.
Changes in group arrangements
The composition of the worldwide group can change over time as companies both join and leave the group. The rules contain provision for this and determine the identity of the worldwide group by reference to the ultimate parent. This means that where the composition of the group changes, the identity of the group will be preserved as long as the ultimate parent remains the same. To provide some examples of how the rules operate:
- Companies joining or leaving a group – apportionment Where a company joins or leaves a worldwide group midway through the group’s period of account, the tax-interest amounts and tax-EBITDA amounts to be included in the group’s computations for the relevant part period will be determined on a just and reasonable basis;
- Change in ultimate parent – carried forward interest allowance Where there is a change in the ultimate parent, then there is a different group and any interest allowance from the previous group cannot be carried forward for future periods. For example, where a company is sold by one group to another, it will not be able to take with it any share of carried forward interest allowance from when it was a member of the seller group (with the seller group retaining the ability to use this in full). Under the draft legislation, this also means that if a group simply inserts a new top holding company (which becomes the ‘ultimate parent’ of the group) any carried forward allowance will be lost completely. We have made representations to HMRC on this point; and
- Change in ultimate parent – reactivation of disallowed interest By contrast, the ability to reactivate disallowed interest expense sits with the company which originally suffered the disallowance, as opposed to being a group level attribute. For example, where a company that has previously suffered a disallowance is sold by one group to another, it may be possible to ‘reactivate’ that disallowed interest if the buyer group has excess interest allowance in a later period (subject to restriction under anti-avoidance rules, where relevant).
This is the eighth in our series of articles on the detail of the new corporate interest restriction regime.
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