Corporate interest restriction ‘devil is in the detail’ – implications for M&A transactions Part 1

Corporate interest restriction ‘devil is in the detail’

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

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This is the eleventh of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR rules were removed from Finance Bill 2017 and we are waiting to see if they will reappear in the promised summer Finance Bill. In the meantime we would recommend that groups continue to assume that the rules will apply from 1 April 2017. This week we start to look at the implications for mergers and acquisitions (M&A) transactions where companies or entire groups or sub-groups are purchased or sold. Next week, we will continue the M&A theme looking at related parties, modelling the implications of the CIR rules, the impact buying and selling companies has on elections that have been made and ensuring that information is available to prepare the CIR calculations.

Some key points for M&A transactions

  • The CIR rules operate by reference to a worldwide group which is
    headed by its ultimate parent. If a group is acquired such that there is a change in the ultimate parent, there will be a new CIR group; and
  • If there is a change in ownership of a company or group, an assessment is required of the implications for carried forward CIR attributes, as to whether these are still available and who can access them.

Changes in composition of the group – source of figures to be used in the CIR calculations

The CIR rules operate by reference to the period of account of a worldwide group which is headed by its ultimate parent. Where the composition of the group changes, the identity of the group will be preserved provided the ultimate parent remains the same. This has the following impact on the CIR figures:

  • Figures used in the CIR calculations which are taken from the
    computations:
    If a company joins or leaves part way through a group’s period of account, the tax-interest amounts and tax-EBITDA amounts will be apportioned to the period of account for which the company is a member of a particular group on a just and reasonable basis. As a result, the deductibility of interest like expenses in the accounting period in which a company is acquired will depend on the circumstances of each group; and
  • Figures used in the CIR calculations which are taken from the group
    accounts:
    Where an entity ceases to be the ultimate parent, perhaps
    because the entire group is acquired, the period of account of the ‘old’ worldwide group will cease and financial statements for the group are treated as drawn up in respect of the period for which the entity was the ultimate parent. If a company joins or leaves a group, no adjustments should be required to the group accounts as these should reflect the results of the company only for the period of ownership.

Utilisation of carried forward amounts
The CIR rules provide for disallowed interest like expenses and unused allowances to be carried forward to a later period.

Carry forward and reactivation of disallowed interest:
Interest-like expenses which have been disallowed are carried forward as an attribute of a company and may be deducted in a later period where there is ‘headroom’ in the amount of the allowable interest. This attribute is carried forward across the sale of the company or a change in the ultimate parent, broadly, provided that the activities of the company continue.

Carried forward interest allowance:
The unused interest allowance for a period can be carried forward for up to five years and may allow more of the interest-like expenses, which arise in a later period, to be deducted. This is an attribute of the group and not of any particular company in the group.

  • Where a group is acquired, the ‘old’ group ceases and any carried forward interest allowance is lost. Similarly, any carried forward allowance will be lost where a new top holding company is inserted which becomes the ‘new’ ultimate parent of the group; and
  • Where a subsidiary is sold or purchased, they will not be able to take with them any interest allowance from when they were a member of the seller group; instead the seller group will retain the ability to utilise any carried forward interest allowance.

Carry forward of excess debt cap amount:
The deductibility of net interest for a period is based, in part, on the debt cap allowance (using figures from the group accounts). Where there is a disallowance in a period and the debt cap is not the limiting factor, the excess debt cap amount can be carried forward and may increase deductible interest in a later period. This is carried forward as a group attribute in a similar manner to a carried forward interest allowance.

Note the existing change in ownership rules (in Part 14 CTA 2010) have not been extended to amounts carried forward under the CIR rules. However, the CIR regime TAAR and possibly the transfer of deductions anti-avoidance provisions (in Part 14A CTA 2010) could be relevant.

The previous articles in this series can be found here: 

 

For further information please contact:

Rob Norris

Mark Eaton

 

 

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