Corporate interest restriction: Charities - KPMG United Kingdom
Share with your friends

Corporate interest restriction ‘devil is in the detail’: Charities

Corporate interest restriction: Charities

This week’s article looks at some potential impacts of the new regime on charities.


Also on

This is the twenty first in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation is included in Finance Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. There is no over-arching exemption from the CIR regime for charities, and groups will need to consider the application of the rules to their specific fact pattern. However, most of the income and gains received by charities are exempt from Income Tax and Corporation Tax provided that the money is then used for charitable purposes only. Accordingly, any disallowance of tax relief for tax-interest expenses under the CIR rules should not have any net impact on the corporation tax liability of a wholly-charitable group.

However, the CIR regime may have a more material impact where a charitable group also undertakes other non-charitable (taxable) activities that are wholly or partly debt-funded. Any such activities would normally be undertaken via a non-charitable subsidiary company, and to the extent the subsidiary is debt-funded by the charity, this would potentially give rise to an intra-group tax asymmetry and potential CIR disallowance. This is due to the fact that the interest expense will generate ‘tax-interest expense’ in the subsidiary (potentially susceptible to disallowance under the CIR regime), which is not offset by any corresponding ‘tax-interest income’ in the charity (where the charity is exempt from tax on the receipt).

There is a special exemption that can help in this scenario, which excludes from the CIR regime interest paid by a company on a loan from being a ‘tax-interest expense’ amount of the company where the lender is a charity of which the borrower company is a wholly-owned subsidiary.

However, this exemption does not assist where debt funding is provided to the non-charitable subsidiary from someone other than a parent charity. In these circumstances, it will be necessary to determine to what extent the resulting ‘aggregate net-tax interest expense’ will be disallowed under the CIR rules (applying the fixed or group ratio method, as appropriate). The fact that tax-exempt income arising to the charity itself will normally be included in calculating group-EBITDA, but not included in calculating ‘aggregate tax-EBITDA’ may make it less attractive for charitable groups to rely on the group ratio election.

Charitable groups (especially housing associations) may therefore find themselves facing additional administrative work and a potential CIR disallowance unless steps are taken to restructure their debt.

The previous articles in this series can be found here.

For further information please contact:

Tania Dimitrovich

Richard Rudman

Connect with us


Want to do business with KPMG?


Request for proposal