This is the fourteenth of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules, and this week we will look at the interaction of the CIR regime with the new rules on utilisation of losses for corporation tax purposes. On 13 July 2017, Ministers 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.
It is expected that new loss utilisation rules will be introduced at the same time as the CIR regime. Flexibility will be introduced to allow losses arising from 1 April 2017 to be carried forward and set against the total taxable profits of a company or its fellow group members. At the same time, for all losses, whenever they arose, a company will only be able to use its own or fellow group companies’ brought forward losses to shelter profits up to its allocated share of the group’s £5 million annual allowance plus 50 percent of its profits above that allocated allowance. Detailed streaming rules require amounts to be apportioned between trading and non-trading profits and losses where a company has pre-1 April 2017 brought forward losses.
The interaction of the CIR and new loss utilisation rules is potentially relevant when there is a restriction under the CIR rules and the group has UK tax losses.
- Both sets of rules contain a number of claims, elections and choices regarding how the relevant rules apply to a particular group or group company. By choosing the group company to which a CIR disallowance and/or reactivation of interest etc. is allocated and the type of interest (e.g. trading or non-trading) which is disallowed and/or reactivated, a group can efficiently manage whether losses are carried forward and how they are utilised.
- In cases where a group suffers (or has previously suffered) a disallowance of interest costs under the CIR regime and has carried forward losses of more than £5m, the precise interaction of the various claims, elections and choices will need to be carefully thought through in order to achieve the optimum net impact on the group’s overall corporation tax liability for a period.
- The CIR allocation of disallowed and reactivated interest etc. is made 12 months after the end of a period and may be revised later. Accordingly, as much hindsight as possible can be used when considering the interaction of the CIR with the new loss utilisation rules.
This is an extremely complex area where it may well be appropriate to model the choices. Some of the relevant factors are illustrated below.
- The CIR rules will apply first and be factored into the calculation of post-1 April 2017 losses.
- When deciding how to allocate a CIR disallowance between group companies, the group may choose to disallow interest in companies that would otherwise generate a loss in the period (which would be carried forward and subject to the new 50 percent restriction when utilised).
- When allocating reactivated interest, where particular group companies have carried forward pre-1 April 2017 losses, the group may prefer to avoid allocating part of the reactivated deduction to those companies, if that would otherwise restrict the carried forward losses from being utilised.
- If a company with brought forward losses is acquired, the new loss utilisation rules prevent an acquired company from surrendering brought forward losses to the buyer group for five years. In these circumstances, it may be beneficial to allocate as much interest disallowance (post-acquisition) to the acquired company, thereby maximising the interest deductions in the buyer group and increasing profits in the acquired company to utilise its brought forward losses.
The previous articles in this series can be found here.
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