CH82294 - Penalties for Inaccuracies: Calculating the penalty: Potential Lost Revenue Corporate Interest Restriction: Example of increased reactivations

This guidance applies to returns which are relevant returns for a corporate interest restriction (CIR) period beginning on or after 1 April 2023.

For relevant returns for periods before this date, HMRC staff should seek advice from the specialist technical team, see CH910000.

Example 1A, B and C are companies in a CIR group.

Their returned results are:

Company A’s return is found to contain a careless inaccuracy which is put right to produce a true taxable profit of £85,000.

Company	Profits	CIR allocation
Company A	£50,000	CIR reactivation £30,000
Company B	£75,000	CIR reactivation £20,000
Company C	£60,000	CIR reactivation £nil
-	-	Original reactivation cap £50,000

As a result of this change, the group is required to submit a revised interest restriction return (IRR), increasing the total reactivation cap by £5,000 from £50,000 to £55,000.

In the revised IRR, Company A increases its CIR reactivation by £25,000, from £30,000 to £55,000, and Company B reduces its reactivation by £20,000, from £20,000 to £nil.

For the purposes of calculating the potential lost revenue (PLR) in Company A, only the proportion of the increase in the reactivated amount that was originally allocated to Company A may be taken into account.

Here, the original allocation was three-fifths to Company A, and two-fifths to Company B. Therefore, in calculating the PLR for Company A, only three fifths of the total increase in reactivation cap of £5,000 can be taken into account.

PLR calculation:

Enquiry adjustment                      £35,000 (£85,000 less £50,000)

CIR increased reactivation           (£3,000) (three-fifths of £5,000)

Additional profits for PLR             £32,000