Autumn Budget 2017: Amendments to CIR Legislation - KPMG United Kingdom
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Autumn Budget 2017: Amendments to CIR Legislation

Autumn Budget 2017: Amendments to CIR Legislation

The CIR rules were finally enacted on 16th November 2017, with retrospective effect from 1st April 2017. However, on 22 November 2017, as part of the Autumn Budget 2017, the Government announced that, following further engagement with affected businesses, various amendments will be made to the enacted legislation to ensure the CIR rules work as intended.


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Some of the changes relate to the general CIR rules; others relate to the special rules for public infrastructure.  Most of the changes appear to be helpful relaxations to assist taxpayers in applying the rules, but some appear to be tightening the scope of the rules to provide additional protections for the Exchequer. Some of the changes will be treated as having effect from 1 April 2017 when the CIR rules commenced, with the remainder having effect from 1 January 2018. (The Budget notice does not specifically state which changes fall in which category.  However, it is possible that the relieving measures will apply from 1 April 2017, with other measures applying from 1 January 2018.)  

Changes to the general CIR rules

The proposed changes to the general CIR rules are as follows:

  • Definition of “group” - Under the CIR rules, any CIR restriction must be calculated at the level of the group and then allocated to individual group companies. The Government have announced that the definition of “group” will be changed “to align it with accounting standards”. No further details have been provided at this stage regarding what this will involve, although the Budget notice states that “some businesses may find that aligning the definition of group with their organisational structure will make applying the rules easier for them”. (The existing rules require the “group” to be determined by reference to consolidation principles under International Accounting Standards (“IAS”). The grouping tests will also be amended to ensure that asset managers do not cause otherwise unrelated businesses to be grouped together. 
  • Calculating “tax-interest” from derivatives – The CIR rules operate to restrict tax relief for a group’s “aggregate net tax-interest expense” (for which it would otherwise obtain relief against corporation tax).  Broadly speaking, this will include any amounts recognised for tax purposes in respect of derivatives hedging financing transactions, but will exclude amounts in respect of derivatives hedging “normal” trading transactions. Changes will be made to the way that a group’s “tax-interest” is calculated to ensure that derivatives hedging a financial trade that is not a banking business are not inappropriately excluded from the rules.
  • Treatment of the RDEC – Under the existing CIR rules, a group’s capacity to claim relief for its tax-interest costs can be capped by reference to 30% of its “tax-EBITDA” (which is based on its UK taxable earnings). However, where a “group ratio election” is made, the 30% figure can be substituted for a higher figure, based on the group’s overall qualifying net interest expense divided by its “group-EBITDA” (which is based on the PBT figure in the group accounts). Under the enacted rules, where a UK group company claims a Research and Development Expenditure Credit (“RDEC”), generating an above-the-line credit (offset by a below-the-line tax credit), this is excluded in calculating “tax-EBITDA”, but included in calculating “group-EBITDA”, thus generating a potentially unfavourable mismatch when applying the group ratio method.  This mismatch is now going to be fixed by aligning the way the RDEC is treated in calculating “group-EBITDA” with the way it is treated in calculating “tax-EBITDA”.
  • Administrative rules – Under the existing rules, where a group is subject to restriction, it will normally submit an “interest restriction return”, calculating the group’s overall disallowance and allocating this between UK group companies, which will then reflect their allocated disallowance in their company tax returns. Changes will be made to the administrative rules to confirm that where group companies have already submitted their tax returns, and an interest restriction return is then submitted, the companies will be required to amend those tax returns if their tax position is changed.

Proposed amendments to the Public Infrastructure rules

The CIR rules include a special regime for “public infrastructure” (“PI”), which (broadly speaking) allows a group to exclude certain third party interest expenses (and some limited grandfathered related party interest expenses) incurred by “qualifying infrastructure companies” (“QICs”) from the scope of the CIR rules.

The conditions that need to be met in order for QICs to access this special regime are complicated and can be difficult to meet in many scenarios where one might expect the special regime to apply. This has led to a number of concerns being expressed to the Government about whether the regime will operate as intended. 

In response to further engagement with affected businesses, the Government has announced that the following changes will be made:

  • Insignificant non-taxable income – Under the existing legislation, in order for a company to qualify as a “QIC”, it must be “fully taxed in the UK”. (Furthermore, the relevant “public infrastructure asset” must be recognised in a balance sheet of a company that is “within the charge to corporation tax in respect of all of its sources of income”.) The Budget notice states that changes will be made to the PI rules “to ensure that insignificant amounts of non-taxable income do not affect their operation”. 
  • Time limit for electing into the regime – Under the existing legislation, in order for a company to elect into the special PI regime, it must file an election with HMRC before the start of the accounting period to which it is to first apply. This time limit will be extended to the last day of the accounting period to which the election is to first apply. The existing legislation already included a transitional rule which allowed an extended deadline of 31 March 2018, where the relevant accounting period begins before 1 April 2018. However, the general extension of the deadline to the last day of the period will allow companies (going forward) welcome flexibility to apply greater hindsight in determining whether it is likely to be beneficial to elect into the regime before deciding whether to do so.
  • Transfer of a QIC’s business – The existing legislation provides that where a QIC transfers all or part of its business to another company that has not elected into the PI regime, the transferee will be deemed to have made such an election. The Budget notice states that this rule will be relaxed so that a third party which acquires an asset from a QIC is not automatically treated as having elected into the regime.
  • Application of the de minimis / conduit structures – As noted above, the special PI regime generally only allows interest expenses incurred by QICs on finance transactions with third parties to be excluded from the CIR rules (and not transactions with related parties, subject to certain limited grandfathering provisions).  An existing anti-conduit rule in the legislation prevents third parties intermediaries being inserted into a series of transactions to convert related party debt into third party debt.  Separately, the CIR regime includes a so-called “de minimis” exemption, under which a group will not be subject to any disallowance of interest costs if its aggregate net tax-interest expense for a period is less than £2 million (on an annualised basis). The basic rule is that where a group includes a “QIC” that has elected into the special PI regime, this special de minimis exemption is switched off. However, where this would result in the group suffering a greater CIR disallowance than if the PI regime had not applied at all, the group will be able to access an “interest capacity” equal to the £2m p/a de minimis threshold. The Budget notice states that a new “limitation” will be imposed on a group’s ability to access the de minimis, with the rules being amended “so that the limitation on relief for related party interest cannot be avoided by using a conduit company to provide the finance”. (Further details are awaited in the draft legislation regarding precisely what mischief this new provision is aimed at. However, the change seems to be confined to amending the de minimis rule, rather than being a more wide ranging


For further information please contact Richard Rudman, Senior Manager.

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