New corporate interest restriction regime | KPMG | UK
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New corporate interest restriction regime

New corporate interest restriction regime

From 1 April 2017 a new regime will restrict the tax deductibility of interest-like expenses for UK companies.


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Who should read this?

The changes are relevant to all UK companies that have interest or interest-like expenses on which they claim relief for UK tax purposes.

Summary of proposal 

With effect from 1 April 2017, a new corporate interest restriction (CIR) regime will disallow interest-like expenses to the extent that the net tax-interest expense for UK companies (broadly, finance charges taken from the UK tax computations) exceeds the interest capacity.

The interest capacity is based on a percentage of tax-EBITDA (earnings before interest, tax, depreciation and amortisation) or, if lower, a modified debt cap limit, but is always at least £2 million. The percentage to be used is derived from either the fixed ratio method or, by election, the group ratio method.

Key changes from the draft legislation

There are a large number of changes to the draft legislation issued on 26 January 2017.  Key changes are as follows, with changes related to specific sectors – infrastructure, banking and insurance – set out in Appendix 1.

Amounts which are potentially subject to a restriction

The definition of interest-like expenses which are potentially subject to a restriction will now exclude income and expenses from derivative contracts which hedge risks arising in the ordinary course of a trade where the contract was not entered into in relation to the capital structure. This change will apply consistently throughout the rules. For example, contracts hedging trading purchases and sales are now expected to be excluded whereas contracts hedging borrowing would be included. 

Relief for amounts which have previously been disallowed

Net interest-like expenses which have been disallowed under the CIR rules can be carried forward indefinitely and utilised in a later period subject to the limits applying for that later period.

The restriction on relief for interest is based, in part, on a measure of the net financing cost recognised in the income statement in the group accounts, known as the modified debt cap. The modified debt cap rule has been amended to make it easier to utilise interest expenses which have been disallowed in an earlier period.

Measures of group interest taken from the consolidated financial statements

Expenses which are ancillary to loan relationships and derivative contracts are included in measures of group interest taken from the consolidated financial statement. The definition for derivative contracts is now consistent with that for loan relationships, and includes the expenses from attempting to bring a derivative contract into existence.

Removing a mismatch for amounts recognised in equity

The modified debt cap limit under the fixed ratio method is calculated by reference to the net interest expense in the group accounts after making certain adjustments. A new adjustment has been introduced to include certain amounts of interest and other items that are recognised in group equity (i.e. not in the group income statement or other comprehensive income).   

The amounts to be included are those that would be brought into account for UK tax purposes under certain provisions if the relevant group member was within the charge to corporation tax. This will impact loans and derivatives entered into in periods beginning before 1 January 2016, and certain regulatory capital. 

This amendment should help to avoid mismatches which may arise between tax and group accounts for UK groups. However, it introduces an additional compliance requirement to analyse the equity movements in the group accounts.

Group ratio method and capital disposals

For each period, a group can elect to calculate the interest capacity as a percentage of tax EBITDA using a percentage being a measure of group net interest expense divided by group EBITDA.  Both amounts are based on the group accounts.

A further election can be made which amends group EBITDA and the measure of group net interest expense in respect of a number of different matters. The treatment of capital disposals when calculating group EBITDA has now been moved to a separate election (capital disposals election).

Absent the capital disposals election, group EBITDA includes the capital profit on the disposal of relevant assets (e.g. shares, property and intangible assets) broadly equal to proceeds less original cost.

With the capital disposals election, group EBITDA includes the net chargeable gain for the period, for UK and non-UK group entities, that would arise assuming that all group members are within the charge to UK corporation tax (ignoring the Substantial Shareholdings Exemption and double tax relief). Where shares in a group member are sold, the disposal of shares is ignored and, instead, the capital gain or loss of each asset owned by the group member must be calculated.

Group ratio method and related parties

For the group ratio method, interest-like expenses arising on amounts owed to arelated party or on results-dependent securities are excluded:

(i) Related party borrowing

Related party borrowing includes third party borrowing where a related party provides a guarantee, indemnity or other financial assistance. There was concern that third party debt could be excluded from the group ratio calculation simply because, for example, a parent has guaranteed its subsidiary’s third party borrowing. However, this rule will now not apply to a related party guarantee which is:

  • provided before 1 April 2017;
  • provided by a member of the group;
  • a pledge in relation to shares in the ultimate parent of the group or a loan to a member of the group; or 
  • a non-financial guarantee provided in respect of obligations to provide goods or services.

The finance cost implicit in amounts payable under a finance lease are included in group interest in the same way as interest payable on a loan. However, if the finance lease was granted before 20 March 2017 it will now not be treated as a related party finance lease (i.e. it will not be included as related party ‘borrowing’).

Persons are treated as related if one is entitled to receive 25% of income available for distribution or 25% of the assets available for distribution on a winding up of the other. Helpfully, this has been revised so that it only applies for persons who have an equity like interest in the borrower. So, interest on a normal commercial loan should not be excluded from the measure of group interest even if the lender would be entitled to more than 25% of the assets of the borrower on a winding up, perhaps because of the nature of their security rights.

There is a new exclusion where persons become related as a result of certain corporate rescue type transactions, using similar wording to reliefs in the loan relationship rules. Persons will not be treated as related parties, broadly, where they would otherwise become related as a result of a release of a loan relationship and it is reasonable to conclude that, without the release and associated arrangements, there would be a material risk that, at sometime within the next 12 months, the borrower would be unable to pay its debts.

(ii) Results-dependent securitiesResults-dependent securities include any borrowing where the cost of the borrowing depends on the results of a group member. Hence, for example, a borrowing with an interest rate which is determined by reference to the amount of profits earned should be excluded.  

There was concern that third party debt could be excluded from the group ratio calculation where the cost of borrowing reduces if results improve, or increases if results deteriorate. However, such a borrowing will now not be a results-dependent security. 

In respect of regulatory capital, adjustments are now only required if it is a related party borrowing. 

Priority rule

A priority rule has been included so that it is clear the CIR rules should be applied after the hybrid and other mismatch rules.

Transitional treatment on 1 April 2017, including final period under the worldwide debt cap regime

Where consolidated accounts for the group straddle the commencement date of 1 April 2017, financial statements are treated as drawn up for the period to 31 March 2017 and from 1 April 2017. A similar provision will now apply for the final period of the worldwide debt cap provisions to 31 March 2017.

The anti-avoidance rule within the CIR regime applies generally to arrangements whenever entered into. However, there are transitional provisions, which make it clear that the anti-avoidance rule does not apply, broadly, if amounts are paid before 1 April 2017 to trigger a deduction before the CIR rules take effect.


The CIR regime will apply from 1 April 2017 regardless of a company’s year-end.

Our view 

The CIR regime represents a major reform of the tax treatment of financing transactions. Those adversely impacted will not just be multi-national groups but can include groups which only operate in the UK. Inevitably, even for those groups which do not suffer a disallowance, there will be a significant additional compliance burden.

The large number of changes reflected in the Finance Bill will take time to digest. However, many of the changes result from HMRC’s engagement with interested parties as part of the consultation process which has been approached in a positive and open manner and the changes are expected to improve the rules.

We would encourage groups to model the impact of the new rules to assess the potential impact on cash tax payments and start to consider what elections may be of benefit.

Read the Appendix 1: Sector specific key changes from the draft legislation.


Rob Norris +44 (0)121 232 3367


Mark Eaton +44 (0)121 232 3405

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