CFM97610 - Interest restriction: charities: introduction

This guidance applies for accounting periods beginning before 1 April 2023. For accounting periods beginning on or after 1 April 2023, TIOPA10/S382(1A) applies to exclude finance costs incurred by charities from the scope of tax-interest expense amounts.

The corporate interest restriction (CIR) rules apply to any company chargeable to corporation tax. ‘Company’ is defined by CTA10/S1121 to include, any body corporate or unincorporated association, other than a partnership, co-ownership scheme (as defined by FSMA2000/S235A), a local authority, or a local authority association. It follows that the rules will embrace bodies corporate set up by Royal Charter, Act of Parliament or Church of England Measure, registered societies companies limited by guarantee and unincorporated associations. While these organisations are generally in the charge to corporation tax in respect of their profits, the position can be complicated where income is not in fact charged to tax. This may arise, for instance:

  • because some of their activities are not regarded as being in the scope of corporation tax (see BIM24000 onwards for examples of mutual companies and other organisations such as professional organisations); or
  • because there are reliefs or exemptions due, notably where the organisation concerned is established for charitable purposes only and satisfies the definition of charity for tax purposes (FA10/SCH6/PARA1(1)).

In the context of charities, CTA10/PT11/CH3 provides for a number of exemptions available to charitable companies, defined in FA10/SCH6/PARA1(2) as a charity that is a body of persons. For general guidance on taxation matters specific to charities, see Charities: detailed guidance notes on how the tax system operates.

The CIR rules apply after most other reliefs and deductions have been claimed so if interest is an expense of an activity that gives rise to profits that are not subject to corporation tax, for instance, the exempt profits of organisations falling within BIM24000, or where the net result of the activity is subject to an statutory exemption or relief, such as those in CTA10/PT11 applying to charitable companies, scientific research associations (CTA10/S469) and eligible bodies (CTA10/S468), the interest will not be a tax-interest expense and cannot be restricted by the CIR. Equally, exempted profits will not fall to be included in tax-EBITDA. The application of the CIR in such cases should be reasonably straightforward, although exempted amounts may still fall to be taken into account in computing group interest and group-EBITDA.

However, in some cases, interest expense is not taken into account in computing the net profits subject to tax, but is instead taken into account in computing a non-trading loan relationships deficit, although in practice, it is unlikely that such deficits can be set against available taxable profits. In such cases, the CIR may be in point; the guidance that follows covers possible approaches to compliance issues that HMRC considers to be acceptable.

In the following pages of guidance:

  • CFM97620 explains the position where the exempted amounts are profits of a trade.
  • CFM97630 explains the position where the exempted amounts are property income.
  • CFM97640 explains how the CIR rules work in the context of a group that includes a company benefiting from a charitable exemption.
  • CFM67650 provides an example.

Interest payable to a charitable company

There is a special rule (at TIOPA10/S459) which provides that interest payable to a charitable company by its wholly-owned subsidiary is not treated as being a tax-interest expense of a company. For details, see CFM95695.