CFM95210 - Summary of the rules - the company and the group

The Corporate Interest Restriction (TIOPA10/PART10) is intended to limit corporation tax deductions for interest expense and similar finance costs (tax-interest) at the level of the worldwide group. Accordingly, the basic calculations are performed at group level for a period of account of the group. The composition of a group is primarily based on the approach adopted in International Financial Reporting Standards (IFRS). A single-company group is possible.

Although the legislation applies to groups of companies, and much of the computational process takes place at group level, it is given effect through a reduction or increase in deductions at the company level. The legislation sets out how the group's position and company's tax position are interrelated. These links that bind together how the legislation operates at group and at company level are a pervasive feature of the Corporate Interest Restriction. For example, Chapter 2 of the legislation (TIOPA10/S375-381), which sets out the core mechanics, works at both company and group level.

For instance, group members subject to corporation tax, known as UK group companies, may be subject to a disallowance of some or all of their net tax-interest expense, or the reactivation of amounts previously disallowed. This can have effect in any relevant accounting period that coincides with or overlaps the group's period of account. Similarly, some of the amounts required for the group level calculations, notably aggregate net tax-interest expense and aggregate tax-EBITDA are based on figures of net tax-interest expense and tax-EBITDA that are taken into account in computing profits or losses subject to corporation tax, at the level of the UK group company. Again, it is necessary to look at the amounts for each company's relevant accounting periods, leaving out those amounts which do not relate to the group's period of account or when the company was not part of the group.

In a similar way, the net tax-interest expense amounts previously disallowed and available for reactivation in a later period are attributable to a company and may be available even where it becomes a member of a different group. Conversely, any unused interest allowance from an earlier period of a group is a group attribute and does not transfer with a company if it becomes a member of a different group.

It is expected that compliance with the rules will usually be managed at the group level by a reporting company. This will normally be appointed by the group, but HMRC can also appoint one in certain cases. The compliance regime is built around the group's interest restriction return, submitted by the reporting company.

The de minimis amount

Although the rules apply to all companies within the charge to corporation tax, they have no tax effect on groups with less than £2 million of net tax-interest expense per annum (the de minimis amount). Where the period of account is not exactly a year in length the de minimis amount for the period is adjusted pro-rata by day count. Under the interest restriction rules, all groups are able to deduct their current period net tax-interest expense up to the de minimis amount.

To determine whether a group falls within the de minimis amount, it is only necessary to establish its membership, and that its aggregate net tax-interest expense is less than the de minimis amount (or, indeed, that it has aggregate net tax-interest income). No reporting requirements would generally apply to companies in such groups. However, if a reporting company is in place for a period of account it will need to file at least an abbreviated return for that period.

Appointment of a reporting company

There is no obligation on a group to appoint a reporting company. If a group is able to satisfy itself that it is not liable to interest restriction, then it may decide there is no benefit from having a reporting company. HMRC also has the right to appoint a reporting company, but does not intend to use this power on a speculative basis or where there is no indication the group might be subject to an interest restriction.

However, if a group wants to calculate and use carried forward unused interest allowance from a period, it must file a full return for that period and any subsequent period before that in which the allowance is used. In this case, it should appoint a reporting company within the statutory time limits to allow the full return to be filed.

Note that the reporting company is permitted to file an abbreviated return for a period in which it does not suffer an interest restriction. It can subsequently, within five years of the period of account, submit a revised full return to establish the carried forward amount available in a later period. For further discussion of the possible future benefits of appointing a reporting company and submitting an abbreviated return, even where no interest restriction is due, see CFM98410.