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HMRC internal manual

Corporate Finance Manual

Interest restriction: core rules: carry forward and reactivations

TIOPA10/S373

TIOPA10/S378-S381

TIOPA10/S392-S396

TIOPA10/S400

The purpose of the carry forward provisions within the Corporate Interest Restriction is to reduce the risk that additional interest restrictions are imposed due to variations over the business cycle, other sources of volatility, and the fact that the rules are applied separately to each period of account.

Volatility in a group’s profitability, or in the prevailing levels of interest rates, could result in large disallowances in one period but none in others, leading to different outcomes depending on when profits are earned. Allowing the carry forward of disallowed amounts for later reactivation, and of unutilised interest allowance, to reduce or prevent future disallowances, achieves smoothing over a period of time.

Net tax-interest disallowances are applied at company level, and the history of disallowances and reactivations creates an attribute, carried forward indefinitely at company level. The attribute is capable of being accessed even if the company becomes a member of a different group.

Brought forward unused interest allowance is a group attribute and can only be used to reduce disallowances by members of the group. It expires after five years.

Carry forward of disallowed amounts and reactivations

A company that has been subject to interest restriction will have a history of disallowances, and possibly reactivations, leaving it with a balance of past disallowances less reactivations at the end of each accounting period. This is its amount available for reactivation (s378).

Where a worldwide group has unused interest allowance for a period of account this must be applied to reactivate amounts at company level. This is not discretionary. Subject to limits set by other rules, the group must reactivate the maximum possible amount in any period of account (s379).

The rules about reactivations are somewhat intricate, because reactivations are at company level and accounting period by accounting period, whereas the interest allowance available is a group attribute, by period of account.

Interest reactivations are only possible where there is a reporting company in place. Interest reactivations are allocated, subject to the applicable rules, at the discretion of the reporting company (Sch7A/paras 25-26).

The amount available for reactivation is a company attribute. It is therefore a possibility that there could be reactivation and disallowance in the same accounting period of the company in two circumstances. The first is where its accounting period straddles two period of account, in one of which there are allocated disallowances and the other allocated reactivations. The same effect may arise if the company changes groups during an accounting period. If there is both reactivation and disallowance in the same accounting period, these amounts are offset at company level (s381).

Carry forward of interest allowance

The calculation of a group’s interest capacity for a period of account works on a cumulative basis (s392). It is the sum of the interest allowance for the period, plus the interest allowance for earlier periods of account that are still available (s393).

The amounts that are brought forward are group attributes; a company joining a group cannot bring with it any interest allowance from a time during which it was a member of a different group.

A group is identified by its ultimate parent. Where there is a change in the ultimate parent, there is a different group and any interest allowance from the previous group cannot be carried forward for future periods.

Time-expiry of interest allowance

Unused interest allowance does not carry forward indefinitely but time expires after five years. The rules determine how much allowance from an originating period is left unexpired in a receiving period, applying time apportionment of originating and/or receiving period where the five year limit is straddled (s395). Unused allowance for an earlier period will always be used before that of a later period (s394(4)).

Enhancement of tax capacity with net tax-interest income

If a group has aggregate net tax-interest income for a period of account, that is added to its basic interest allowance for the period to augment its interest allowance for the year and, as a result, the amount potentially available for carry-forward (s396).

Where a group has aggregate net tax-interest income for a period it is possible that the group will contain companies with brought forward disallowances. The capacity for the year (which will include its net tax-interest income) must first be applied to reactivate such carried-forward disallowed tax-interest amounts (s379).

The combination of the possibility of applying the net tax-interest income of a period to either increase the reactivation of disallowed amounts from earlier years or augment allowance carried forward to later years provides an indirect mechanism for offsetting net tax-interest income of a period against net tax-interest expense of an earlier or later year.

Carry forward of excess debt cap

Excess debt cap can arise where there is an interest disallowance in a period and the debt cap is not the limiting factor in computing a group’s basic interest allowance for a period (s400). Excess debt cap can arise if either the fixed ratio method or the group ratio method is applied.

Where the fixed ratio method applies, excess debt cap for a period of account is the fixed ratio debt cap based on the group’s adjusted net group-interest expense (ANGIE) less 30% of aggregate tax-EBITDA.

Where the group ratio method applies, excess debt cap for a period of account is the group ratio debt cap based on the group’s qualifying net group-interest expense (QNGIE), less the group ratio percentage of aggregate tax-EBITDA.

There is a limit on the amount of excess debt cap that can be carried forward; the carried forward limit. This is the sum of any excess debt cap from the period immediately before the period of account plus the total disallowed amount for that period.

The excess debt cap carry-forward is likely to be of practical significance for a group where in most periods the debt cap is the factor limiting interest capacity, but in a particular period of account the aggregate tax-EBITDA figure is unusually low. The aggregate tax-EBITDA multiplied by the fixed ratio or group ratio, as applicable, becomes the limiting factor on interest capacity in that period, rather than the debt cap. In the next period of account, the brought forward excess debt cap increases the debt cap for the year. Therefore, if the level of tax-EBITDA is no longer the limiting factor, the group’s interest allowance is increased by the excess debt cap brought forward.

The excess debt cap is available in the next period even if the group switches from applying the fixed ratio method to the group ratio method, or vice versa; there is no need to recalculate the figure on a different basis when this happens.