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