This week’s article looks at the treatment of amounts carried forward under the CIR regime.
This is the sixteenth 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 treatment of amounts carried forward under the CIR regime. The carry forward rules are intended to reduce the impact of earnings volatility and timing differences on the deductibility of interest by allowing unused amounts to be utilised in a later period
The CIR rules include three sets of carry forward provisions.
Carry forward and reactivation of disallowed interest
Interest-like expenses which have been disallowed are carried forward and reactivated, i.e. deducted, in a later period where the interest allowance of the group exceeds the net interest-like expenses for the period. Broadly, the amount of interest-like expenses of the group which are to be restricted must be allocated between UK group companies and specific expenses (e.g. non-trading interest) are disallowed in the computations. Such disallowed amounts are carried forward by the company indefinitely unless the activity that generated them ceases or becomes small or negligible.
These previously disallowed interest-like expenses are reactivated, and become deductible, when the interest allowance of the group for a later period exceeds the net interest-like expenses for that later period. The group must reactivate the maximum possible amount for the period, but can choose which expenses are reactivated, and in which company, subject to certain rules.
Disallowed interest is an attribute of a company (not the group). It is carried forward across the sale of the company or a change in the ultimate parent (subject to potential application of anti-avoidance rules, where relevant).
Carry forward of the interest allowance
Net interest-like expenses for UK companies are deductible to the extent that they do not exceed the sum of the interest allowance for the current period plus the carried forward interest allowances for earlier periods that have not expired.
The amount carried forward from a period is the excess interest allowance for that period less the amount which has been subsequently utilised or has expired. The carried forward amount does not include an amount arising from the £2 million de minimis allowance which has not been utilised.
Broadly, the excess interest allowance for a period can be carried forward for up to five years. The current period interest allowance is utilised first and, after that, unused interest allowances of earlier periods are used in a ‘first in, first out’ order of priority.
The carried forward interest allowance is an attribute of the group and not of any particular company, so where a group is acquired, the acquired ‘old’ group ceases and any 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.
Carry forward of excess debt cap amount
The deductibility of net interest-like expenses for a period is based, in part, on the debt cap allowance for the period of account, determined by reference to the net interest in 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 indefinitely and may increase the debt cap amount in a later period. This is likely to be relevant where the aggregate tax-EBITDA, either multiplied by the fixed ratio or group ratio percentage, is the limiting factor on the interest capacity in a period rather than the debt cap amount.
The calculations are not straightforward, are undertaken on a cumulative basis and will need to be modelled.
The carried forward debt cap allowance is an attribute of the group and not of any particular company. It ceases to exist where a group is acquired or a new ultimate parent is inserted at the top of a group.
Reactivation of amounts disallowed by the hybrid rules
In the revised draft legislation published on 13 July 2017, a new provision was added to deal with cases where tax-interest expense amounts are disallowed in one accounting period under the hybrid rules (or any other tax rules) and are subsequently reactivated under the hybrid rules (or any other tax rules) in a subsequent accounting period. The reactivated amounts are deemed to be treated as ‘tax-interest expense amounts’ in that subsequent period (if they would not otherwise be so treated) and so are potentially subject to restriction under the CIR rules.
The previous articles in this series can be found here.
For further information please contact: