The CIR rules include a special regime for “public infrastructure” (“PI”), which (broadly speaking) allows a group to exclude certain third party interest expenses (and some limited grandfathered related party interest expenses) incurred by “qualifying infrastructure companies” (“QICs”) from the scope of the CIR rules.
The conditions that need to be met in order for QICs to access this special regime are complicated and can be difficult to meet in many scenarios where one might expect the special regime to apply. This has led to a number of concerns being expressed to the Government about whether the regime will operate as intended.
In response to further engagement with affected businesses, the Government has announced that the following changes will be made:
- Insignificant non-taxable income – Under the existing legislation, in order for a company to qualify as a “QIC”, it must be “fully taxed in the UK”. (Furthermore, the relevant “public infrastructure asset” must be recognised in a balance sheet of a company that is “within the charge to corporation tax in respect of all of its sources of income”.) The Budget notice states that changes will be made to the PI rules “to ensure that insignificant amounts of non-taxable income do not affect their operation”.
- Time limit for electing into the regime – Under the existing legislation, in order for a company to elect into the special PI regime, it must file an election with HMRC before the start of the accounting period to which it is to first apply. This time limit will be extended to the last day of the accounting period to which the election is to first apply. The existing legislation already included a transitional rule which allowed an extended deadline of 31 March 2018, where the relevant accounting period begins before 1 April 2018. However, the general extension of the deadline to the last day of the period will allow companies (going forward) welcome flexibility to apply greater hindsight in determining whether it is likely to be beneficial to elect into the regime before deciding whether to do so.
- Transfer of a QIC’s business – The existing legislation provides that where a QIC transfers all or part of its business to another company that has not elected into the PI regime, the transferee will be deemed to have made such an election. The Budget notice states that this rule will be relaxed so that a third party which acquires an asset from a QIC is not automatically treated as having elected into the regime.
- Application of the de minimis / conduit structures – As noted above, the special PI regime generally only allows interest expenses incurred by QICs on finance transactions with third parties to be excluded from the CIR rules (and not transactions with related parties, subject to certain limited grandfathering provisions). An existing anti-conduit rule in the legislation prevents third parties intermediaries being inserted into a series of transactions to convert related party debt into third party debt. Separately, the CIR regime includes a so-called “de minimis” exemption, under which a group will not be subject to any disallowance of interest costs if its aggregate net tax-interest expense for a period is less than £2 million (on an annualised basis). The basic rule is that where a group includes a “QIC” that has elected into the special PI regime, this special de minimis exemption is switched off. However, where this would result in the group suffering a greater CIR disallowance than if the PI regime had not applied at all, the group will be able to access an “interest capacity” equal to the £2m p/a de minimis threshold. The Budget notice states that a new “limitation” will be imposed on a group’s ability to access the de minimis, with the rules being amended “so that the limitation on relief for related party interest cannot be avoided by using a conduit company to provide the finance”. (Further details are awaited in the draft legislation regarding precisely what mischief this new provision is aimed at. However, the change seems to be confined to amending the de minimis rule, rather than being a more wide ranging
For further information please contact Richard Rudman, Senior Manager.