Corporate interest restriction ‘devil is in the detail’ | KPMG | UK

Corporate interest restriction ‘devil is in the detail’ – leasing

Corporate interest restriction ‘devil is in the detail’

This week’s article looks at the treatment of leases.

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This is the seventeenth in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. Ministers have confirmed that the CIR legislation will be included in a Finance Bill, to be introduced as soon as possible after the summer recess, with the start date continuing to be 1 April 2017. In this week’s article, we consider the way that the CIR rules specifically deal with leases.  

Net tax-interest

In determining a company’s ‘net tax-interest’ (which, when aggregated with other group companies’ results, forms the amount to be tested under the CIR rules), the identification of tax-interest follows the accounting characterisation as a finance or operating lease:

  • ‘Tax-interest’ specifically includes amounts brought into account for corporation tax purposes in respect of the financing cost (or income) implicit in amounts payable under a finance lease.
  • It therefore will not include any amounts under operating leases, even those that qualify as ‘long funding leases’. This was in line with OECD guidance on the relative treatment of finance and operating leases which suggested that a finance lease was economically akin to a loan but an operating lease was not.
  • Currently there is no specific provision dealing with any fees charged in connection with the finance lease arrangement. Further guidance from HMRC is expected on this point later in the year. It is noted that for loan relationships, the position is more clear-cut as fees forming part of the financing arrangement are included within financing costs/income. 

Tax-EBITDA 

In determining a company’s tax-EBITDA (which, when aggregated with other group companies’ results, is used as the basis for calculating the group’s interest capacity under the CIR rules), adjustments will need to be made to the company’s taxable profits in respect of:

  • Tax-interest income/expenses under finance leases (see above);
  • Capital allowances claimed by the lessor or lessee (as appropriate) in respect of the leased asset; and
  • Certain other specific adjustments required to ensure that tax-EBITDA is computed consistently for finance leases and operating leases regardless of whether they are taxed as ‘long funding leases’.

Net group interest expense (NGIE) (taken from the group accounts) 

Financing charges (or income) implicit in payments made under a finance lease are specifically brought into account as relevant expense (or income) matters in calculating a group’s NGIE (which forms the basis for the group’s aggregated net group interest expense (ANGIE) and qualifying new group interest expense (QNGIE). These are relevant to the debt cap and calculation of the group ratio percentage.

If a lessee is party to a finance lease with a related party, the finance charge will be excluded in calculating the lessee’s QNGIE, unless the lease was granted before 20 March 2017.

Group EBITDA 

In determining the group EBITDA, adjustments will need to be made to the amounts recognised in profit and loss in the group’s financial statements in respect of the following:

  • When adjusting PBT for NGIE, financing charges (or income) implicit in payments made under a finance lease which are brought into account in calculating NGIE (see above);
  • When adjusting PBT for the group’s depreciation and amortisation.
    • Depreciation in respect of any ‘relevant asset’ (as lessee) under a finance lease is added back.  (‘Relevant asset’ is defined as an asset that is (a) plant, property and equipment, (b) an investment property, (c) an intangible asset, (d) goodwill, (e) shares in a company, or (f) an interest in an entity which entitles the holder to a share of the profits of the entity.).
    • Depreciation in respect of any asset leased by a group company (as lessor) under an operating lease is added back.

Future developments - change of lease accounting standard

For entities using IFRS, the existing lease accounting standard (IAS 17) will be replaced with a new lease accounting standard (IFRS 16) with effect for accounting periods generally commencing on or after 1 January 2019. Under this new lease accounting standard, lessees under operating leases will experience the most significant changes – they will now be required to capitalise on their balance sheets assets which are currently leased under operating lease arrangements and recognise a ‘right of use’ asset with a concomitant finance lease liability. 

HMRC will be launching a detailed consultation on lease taxation in autumn 2017. For more information, see our Tax Matters Digest article of 21 July.

The previous articles in this series can be found here: 

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