UK: Corporate interest restriction; proposed commencement and transitional provisions

UK: Corporate interest restriction

The next article in our series considers the commencement and transitional provisions of the new CIR regime.

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This is the sixth of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules, which have been removed from Finance Bill 2017 following the announcement of the general election. Based upon the HMRC messaging that “There has been no policy change and the Government has announced it will legislate for the provisions at the earliest opportunity in the next Parliament” we would recommend that groups assume that the rules will apply from 1 April 2017 until an announcement is made by Ministers. This article considers the commencement and transitional provisions, applying this assumed commencement date. For groups which do not draw up accounts to 31 March 2017, amounts taken from the computations and group accounts will have to be apportioned to the final period for the worldwide debt cap rules and the first period under the CIR regime.

Commencement

The CIR regime applies to periods beginning on or after 1 April 2017 and, where a period straddles this date, the rules are applied as though a period begins on 1 April 2017.

The worldwide debt cap regime is repealed for periods beginning on or after 1 April 2017 and, where a period straddles this date, there is a notional final period ending on 31 March 2017.

Transitional rules for amounts in the tax computations which may be disallowed

The net interest-like expenses which are potentially disallowable under the CIR regime are taken from the tax computations. Where the computations are prepared for a period which straddles the commencement date, the interest-like amounts must be apportioned to the deemed period starting on 1 April 2017 on a just and reasonable basis.

The post 1 April 2017 tax computations may include transitional adjustments which are being spread forward over ten years following a change in accounting policy in a period beginning before 1 April 2017 or, less commonly, over five years following the move to a ‘follow the profit and loss’ approach for periods beginning on or after 1 January 2016. Such transitional adjustments are ignored for the purposes of the CIR regime.

Where UK companies have entered into derivative hedging contracts before 1 April 2020, an election can be made before 1 April 2018 which is intended to exclude fair value movements from the amounts taken from the computations so that these amounts are more certain. Derivatives will be considered in more detail in a later article in this series.

Transitional rules for amounts taken from the group accounts

Both the worldwide debt cap rules, which cease to apply from 31 March 2017, and the CIR rules, which apply from 1 April 2017, use amounts taken from the consolidated financial statements. 

Where a period straddles 1 April 2017, such amounts are determined as though the consolidated financial statements had been drawn up first to 31 March 2017 and then from 1 April 2017. Amounts in the straddling period are to be apportioned on a time basis unless this would work unjustly and unreasonably, in which case a just and reasonable method is used.

Transitional treatment for the targeted anti-avoidance rule (TAAR)

The CIR regime includes a TAAR which provides for a counteraction, on a just and reasonable basis, where there are arrangements with a main purpose of obtaining a tax advantage by not leaving amounts out of account or bringing amounts into account. 

  • The TAAR can apply to arrangements entered into prior to 1 April 2017 but does not apply, broadly, where an amount is paid before then which might have been disallowed if it had been paid subsequently.
  • The TAAR does not apply if obtaining the tax advantage can reasonably be regarded as arising from certain commercial restructuring arrangements entered into in connection with the commencement of the CIR regime.

Transitional regulations dealing with mismatches in the financial statements

Draft regulations have been published for consultation which will provide for mandatory transitional adjustments in two scenarios to prevent unintended results occurring from mismatches between the tax and accounting treatment. Further details were provided in the first article in this series (link below).

The consultation period in respect of the draft regulations closes on 26 May 2017.

This is the sixth in our series of articles on the detail of the new corporate interest restriction regime. Our previous articles covered Draft guidance and regulations on the regime, the debt cap when applying the fixed ratio method, the Elections to adjust the group ratio method calculation, The group ratio method and related parties, and The public benefit infrastructure exemption

 

For more information, contact a tax professional with the KPMG member firm in the UK:

Rob Norris | +44 121 2323367 | rob.norris@kpmg.co.uk

Mark Eaton | +441212323405 | mark.eaton@kpmg.co.uk

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