CFM98380 - Interest restriction: commencement rules: power to make elections under the Disregards Regulations

F(No.2)A17/Sch5/Para31

  • The amounts of group-interest and group-EBITDA that are used for the fixed ratio debt cap and the group ratio method are calculated on the assumption that regulations 7, 8 and 9 of the Disregards Regulations (S.I. 2004 / 3256) are applied. This ‘disregards’ fair value movements related to derivative contracts that have a hedging function, and instead recognises amounts in line with the hedged item.
  • The calculation of these amounts is likely to be closely aligned with the amounts brought into account in the tax returns and computation of individual companies where companies have elected into regulations 7, 8 and 9 of the Disregard Regulations, or where the companies have designated hedging relationships that are highly effective in their financial statements.
  • However, significant differences can exist where companies have not elected into the Disregard Regulations and either they have not designated a hedging relation in their accounts or there are significant amounts of hedge ineffectiveness.
  • Many companies will have already decided whether to elect into regulations 7, 8 and 9 of the Disregard Regulations and are currently locked into this choice for a three year window. Given this the rules provide for an election to be made so that the Corporate Interest Restriction rules are applied on the assumption that the company had elected into regulations 7, 8 and 9.

Form of the election

An election under Para31 needs to be made by 31 March 2018 and is irrevocable.

An election under Para31 only has effect if every UK company (except dormant companies) that was a member of the worldwide group as at 1 April 2017 makes the election.

A single person may make an election covering all the companies in the group as that date as long as they have the authority from each company to do so and it is clear from the election which companies the election applies to. There is no prescribed form for the election. If the group has a Customer Compliance Manager (CCM), elections can be sent to them, otherwise see the CIR internet page for where to send elections.

Application

Where the election has effect, the amounts of tax-interest and tax-EBITDA are calculated on the assumption that each company has elected into regulations 7, 8 and 9. The amounts of interest allowance, interest capacity and disallowed interest follow on from this and are calculated in the normal way.

However, as a result of treating the company as if it had applied regulations 7, 8 and 9 it is possible that a company could be required to disallow an amount of tax-interest expense that would not actually feature in its tax return and computations.

Para31 uses the same mechanism as the election to disapply fair value accounting. So where this applies the company is treated as having a matching debit and credit. The debit amount can therefore be restricted under the rules, leaving the company to bring the credit into account for the period.

Example

A company does not apply regulation 9 in its tax return and computations. It entered into an interest rate swap which operated as an undesignated cash flow hedge of a floating rate loan. The swap was closed out in the year ended 31 December 2016 and the resulting loss was recognised in its accounts and tax computation in that year. The loan is still in existence and is due to be repaid in 2020.

All the companies in the group make an election under Para31. As a result, the company is considered to have applied regulation 9 to the swap. This would have resulted in the loss on closing out of the swap to be spread over the remaining term of the loan. Assume that it would have been required to be bring a loss of £100,000 into account for the period ended 31 December 2018.

In the event that the £100,000 is to be disallowed the company is treated as if it had a £100,000 debit and a £100,000 credit for the period. As a result, the £100,000 can be restricted leaving the £100,000 to be brought into account for the period. The £100,000 that is restricted can be carried forward and accessed in a later period where there is sufficient interest capacity.