This is the twelfth of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR rules were removed from Finance Bill 2017 and we are waiting to see if they will reappear in the promised summer Finance Bill. In the meantime, we would recommend that groups continue to assume that the rules will apply from 1 April 2017. This week we continue last week’s M&A theme by looking at related parties, modelling the implications of the CIR rules, the impact buying and selling companies has on elections that have been made and ensuring that information is available to prepare the CIR calculations.
If a company elects to apply the CIR rules using the group ratio method, the interest capacity is based, in part, on a measure of the net group-interest expense derived from the group accounts (qualifying net group-interest expense). For these purposes, interest like-expenses payable to a related party are not included, thereby reducing the capacity to deduct interest.
- Third party loans deemed to be related party loans because of related party guarantee etc. – In certain circumstances, a third party loan can be deemed to be a related party loan if a guarantee or other financial assistance is provided by a related party of the borrower. However, a third party lender (e.g. a bank) will not be treated as a related party as a result of a guarantee etc. either where this is provided before 1 April 2017 or is provided by a member of the CIR group. Accordingly, a bank’s security package should not cause them to be treated as a related party provided that the guarantees are only from companies within the CIR group.
- Arrangement fees charged by shareholders - A fund which is a shareholder in a company which has borrowed from a third party, e.g. a bank, may charge the company a fee for arranging the company’s borrowing. The amortisation of this fee is unlikely to be included in the qualifying net group-interest expense if the fee is not ’incurred directly’ in bringing the third party loan relationship borrowing into existence. Alternatively, if the fee is ’incurred directly’, it is likely to be excluded because it relates to a transaction with a related party (the shareholder fund).
- Bank lender with an equity stake treated as a related party? - A bank lender to the group may receive an equity stake in the group, perhaps ranking equally with management. If the bank’s interest in the equity of the borrower group is less than 25 percent, they are unlikely to be treated as a related party unless the rights of other investors are required to be attributed to the bank.
- Private equity owned groups - For groups which are owned by private equity partnerships, particular care will be required to identify funding from related parties.
The CIR rules contain various elections and, where companies are purchased or sold, it will be necessary to assess the impact of elections on the acquired company or group.
For example, where a company becomes a member of a new CIR group, any elections made in respect of the ‘old’ CIR group will cease to apply to the company and calculations will be based on whether the ‘new’ CIR group has made an election.
Information required for the CIR calculations
If companies are purchased or sold by a group on or after 1 April 2017, the contract should ensure that the information required to complete the CIR calculations will be made available and that the company being sold will consent to an election if required. The attribution of disallowed and reactivated interest should also be confirmed, including the apportionment between the old and new groups.
Modelling impact of the CIR rules
- Modelling tax relief for financing costs – This financial modelling will be more difficult going forward because this will need to take account of the complex CIR carry forward and reactivation rules, as well as the possible impact of the hybrid mismatch and loss utilisation rules.
- Challenging tax assumptions and considering structuring options – Businesses may wish to undertake some initial modelling early on in the process to challenge assumptions about the deductibility of interest on third party debt and to identify where the structure needs to be amended.
The previous articles in this series can be found here.
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