Due to increasingly high interest rates, more companies are now likely to fall within the CIR regime. We outline what the rules mean, the interaction with other tax legislation and what the next steps are for companies.
Borrowing costs have increased exponentially over the last 18 months. This has put more pressure on businesses to control operating costs, and limited their ability to fund capital investment. Perhaps a less obvious result is that some interest may not be deductible for tax under the CIR rules.
The Bank of England (BoE) base interest rate is currently 5.25%. The rate has risen at an accelerated pace since December 2021 when it stood at 0.25%. The last time interest rates were this high was during the 2008 global financial crisis.
Rising interest rates mean higher interest costs for companies. In the past, when companies could claim full relief for interest costs, their impact was somewhat softened. In the current environment, companies are having to pay much more interest for the same borrowing, and the CIR rules are biting by restricting the deduction of such costs.
The CIR rules: what they mean
The rules were introduced in April 2017, with both companies and advisors adjusting to their complexity since then. Here’s a quick recap:
- A UK group (or UK company) can generally claim interest of up to £2m per year without any onerous compliance requirements. This is known as the de minimis limit. Where financing costs exceed £2m, consideration needs to be given to the CIR rules. A CIR analysis may mean some interest costs are not deductible in the company’s tax returns. But it’s possible some of these disallowed interest costs can be used in the future, subject to certain conditions.
- The £2m CIR de minimis limit has not changed since its introduction in April 2017, when the BoE base rate was 0.25%. Many had hoped that to ease the challenge of high interest rates, this limit would be increased. But sadly it wasn’t on the agenda for the Chancellor’s Spring Budget this year.
- If a UK group has interest costs of more than £2m, it can elect to use either the fixed ratio or the group ratio, meaning that interest deductions are limited to the higher of the two. Put simply, the fixed ratio allows a UK group to claim interest of up to 30% of its tax EBITDA (earnings before interest, taxes, depreciation, and amortisation). On the other hand, the group ratio allows a UK group to claim interest of up to 100% of its tax EBITDA.
- A UK group can make a public benefit infrastructure election if it meets certain criteria. This may provide the option of higher interest deductions. But groups must judge carefully whether this election is beneficial to them, and that means detailed analysis and calculations.
A taxable company in the UK can choose this option if it carries out qualifying infrastructure activities (i.e. those providing public infrastructure assets). This requires detailed income and assets tests, prescribed in legislation. The tests are complicated but, broadly, it is possible for companies that qualify to exempt their interest costs from the CIR restriction.
Which other tax rules are relevant?
A number of other tax rules interact with the CIR rules:
- The late interest rules which can apply, for example, if the lender falls outside the loan relationship rules or if interest is not paid within 12 months, can cause a delay in the accounting period in which interest is paid. So for groups that have accrued unpaid interest, this may create more issues with CIR. For example, largest payments of interest in a period may be subject to the restrictions.
- If a group has entered into cross-border finance agreements with connected companies, and transfer pricing applies, it’s important that the rates used can be supported on an arm’s length basis. If there is a transfer pricing adjustment, this may reduce the interest costs that could be deductible for tax and therefore impact the CIR calculations.
- The UK anti-hybrid rules are designed to tackle groups that try to take advantage of local rules either to get tax deductions for payments in multiple jurisdictions, or to exclude income from being taxed. There is separate legislation that covers these rules but, when preparing the CIR calculations, it’s important to consider any such arrangements.
UK groups must comply with certain other requirements, such as appointing a reporting company and filing interest restriction returns every year.
What should companies do now?
The CIR rules are contained in part 10 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). They are complex and all UK companies should address them at an early stage in the compliance process. This applies especially where interest is a major component of overall costs.
We are in a period of high interest rates and high inflation. Companies are under increasing pressure to keep costs down to remain competitive. They must also keep a close eye on future cash flow, including payments of tax. Companies should engage with their tax advisors early on, so they can identify any potential challenges in good time.
If you would like further guidance on any of the issues raised in this article, our Corporation Tax team can provide tailored advice based on your business’s specific circumstances. Please contact Catherine Heyes.
