Policy paper

Changes to the Corporate Interest Restriction rules

Published 7 November 2018

Who is likely to be affected

Large businesses within the charge to Corporation Tax that incur net interest expense and other financing costs (within the scope of Corporation Tax) above £2 million per annum.

General description of the measure

This measure makes technical amendments to the Corporate Interest Restriction (CIR) rules to make sure the regime works as intended.

Policy objective

The CIR rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense. They are part of the government’s wider changes to encourage alignment of the location of taxable profits with the location of economic activity, and are consistent with the UK’s more territorial approach to corporate taxation.

Background to the measure

The CIR rules were enacted in schedule 5 of Finance (No.2) Act 2017. A tax information and impact note for the CIR rules was published on 5 December 2016 which provides further details of the background to the regime.

As a result of further engagement with affected businesses, certain technical amendments to the legislation have been identified that are necessary for the regime to work as intended.

Draft legislation was published for consultation on 6 July 2018.

This tax information and impact note updates the note originally published alongside the draft legislation on 6 July 2018.

Other amendments are being made to the CIR rules in Finance Bill 2018-19 in response to changes in lease accounting.

Detailed proposal

Operative date

The proposed revisions below are to have effect for periods commencing on or after 1 January 2019, unless otherwise stated.

Current law

The CIR rules are in part 10 of Taxation (International and Other Provisions) Act 2010.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19 to make technical amendments to make sure the rules operate as intended:

• the definition of tax-interest is clarified to make sure that where interest is capitalised in an intangible fixed asset for accounting purposes, and that asset is amortised or written off, the proportion that relates to the capitalised interest should be included in tax-interest (new section 393A)
• the provisions governing the carry forward of unused interest allowance and excess debt cap will be amended to permit these amounts to continue to be carried forward where a new worldwide group comes into existence as a result of the insertion of a new parent company between the old group’s ultimate parent company and its shareholders in cases where the shareholders’ interests in the new ultimate parent company effectively replicate those in the ultimate parent of the old group (such that the requirements in section 724A Corporation Tax Act 2010 are satisfied) (new sections 395A and 400A) – this will have effect in relation to any change of ownership from 29 October 2018
• the calculation of adjusted net group-interest expense will be amended to make sure that it deals correctly with capitalised interest and that debt releases with a connected company outside of the group do not distort the calculation (sections 413 and 423)
• the calculation of group-EBITDA will be amended to make sure that, when an alternative calculation election has been made, the calculation is aligned with the normal UK tax rules on unpaid employee remuneration (new section 424A)
• the ‘change of accounting policy’ rule which applies where an alternative calculation election has been made will be amended to make sure that this only applies where there has been an actual change of accounting policy, and to make sure that it includes the property income change of basis rules (section 426)
• the interest allowance (non-consolidated investment) election will be amended to make sure that any additional amounts of adjusted net group-interest expense and qualifying net group-interest expense as a result of this election are included as part of a single calculation in section 413(1) or section 414(1), with section 413(2) or section 414(2) then applying to the resulting amount (section 427)
• the public infrastructure rules will be amended to make sure that a company can still have access to these rules if it holds a pension fund asset and/or deferred tax asset (section 433) – this will be treated as always having had effect
• the public infrastructure rules will also be amended to make sure that, where a company is reimbursed for certain variable operating costs incurred under a contract with a public body, this does not affect the highly predictable nature of the company’s income and the company can still access the grandfathering rules (section 439) – this will be treated as always having had effect
• the rules which deal with the CIR treatment for Real Estate Investment Trusts (REITs) will be amended to make sure that REITs are within the scope of the rules as intended and that they do not effectively suffer a double restriction where the financing-cost ratio test at section 543 of Corporation Tax Act 2010 results in ‘the excess’ being charged to CT (section 452) – the second element of this will be treated as always having had effect
• the administrative rules will be amended to extend the time limit groups have to appoint a reporting company or to revoke such an appointment (paragraphs 1, 2 and 7 of Schedule 7A) - this will have effect from Royal Assent
• the time limits for submitting an interest restriction return will be extended where a worldwide group’s period of account comes to an end less than 12 months after it starts because the ultimate parent becomes a member of a successor group, for instance on a takeover (new paragraph 7A of schedule 7A) – this will have effect where the affected period ends on or after 29 October 2018
• the administrative rules will also be amended to make sure that HMRC can specify other information, as may be reasonably required, to be included in returns (paragraph 20 of schedule 7A) - this will have effect for returns submitted on or after 1 April 2019

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
Nil	Nil	Nil	Nil	Nil	Nil

This measure is not expected to have an Exchequer impact. This measure supports the Exchequer in its commitment to protect revenue.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure has no impact on individuals or households as it only affects businesses.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure is not expected to impact on any of the groups with protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on the 3,800 businesses affected by CIR. There may be one-off costs to familiarise themselves with the amendments to the CIR rules. On-going costs are expected to be negligible.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure is not expected to have any operational impacts.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through regular communication with affected taxpayer groups to ensure the legislation is operating as intended.

Further advice

If you have any questions about this change, please contact the HMRC CIR team by email: interest-restriction.mailbox@hmrc.gsi.gov.uk.