We consider some of the changes to the corporate interest restriction rules included in Finance Bill 2019 which are relevant to M&A transactions.
In this article we consider some of the changes to the corporate interest restriction (CIR) rules included in Finance Bill 2019 which are relevant to M&A transactions.
• Non-UK resident companies carrying on a UK property business are due to come within the charge to corporation tax from April 2020 and will become subject to the CIR rules. Certain amendments to the CIR rules apply by reference to 29 October 2018 and must be taken into account when amending existing funding arrangements or funding new property investments.
• More generally, HMRC have made various changes to simplify and improve the operation of the CIR rules which will be helpful where a CIR group is acquired.
Finance Bill 2019 includes draft legislation applying UK corporation tax rules to non-UK resident companies carrying on a UK property business etc. which is due to apply from 6 April 2020.
When applying the CIR rules, funding provided by related parties and third party funding guaranteed by a related party may be treated less favourably than third party funding.
Draft legislation provides that certain guarantees etc. entered into prior to 29 October 2018 will be grandfathered by amending existing relieving provisions. As a result, third party funding may not be tainted by a guarantee etc. from a related party. This is potentially relevant for assessing the CIR position where the group ratio method is to be applied or the public infrastructure exemption is to be claimed.
If a non-UK resident company is impacted by a guarantee etc. which is expected to fall within one of the grandfathering provisions from 6 April 2020, the grandfathering treatment may be foregone if the arrangements are amended on or after 29 October 2018 such that it cannot be said that the financial assistance was provided before 29 October 2018. Whether this is the case is likely to depend on the nature and extent of the changes.
Targeted anti-avoidance rule
The rules for UK property businesses coming within the charge to corporation tax have a targeted anti-avoidance rule (“the UK property business TAAR”) which applies to an arrangement entered into on or after 29 October 2018 where the main purpose or one of the main purposes is to secure a tax advantage related to the coming into force of these rules.
When implementing new arrangements or amending existing arrangements, consideration will need to be given to the potential application of the TAAR. Since this is a test of the main purposes, the potential application will be determined, in part, by the factual position.
For CIR purposes, there is an exclusion from the UK property business TAAR for certain arrangements to secure a benefit under the CIR rules. This applies if, in connection with the coming into force of the new corporation tax treatment for UK property businesses etc., a company enters into an arrangement effected by taking only ordinary commercial steps in order to secure the benefit of a relief expressly conferred by the CIR rules and securing the tax advantage is wholly consistent with the policy objectives of the CIR rules.
If these conditions are satisfied, the CIR tax advantage will not be counteracted under either the UK property business TAAR (for arrangements entered into on or after 29 October 2018) or by the TAAR in the CIR regime (whenever the arrangements were entered into).
The drafting here is similar to transitional provisions applicable to the existing CIR TAAR and we would hope that the helpful HMRC guidance on this may also apply in relation to the UK property business TAAR.
Following the introduction of the CIR rules with effect from 1 April 2017, a number of practical issues have been identified and HMRC are making changes to address some of these.
Carry forward of interest allowance and excess debt cap where a CIR group is acquired
Under the existing CIR rules, where an ultimate parent company of a CIR group ceases to be the ultimate parent of the group, the CIR group will cease to exist and any carried forward unused interest allowance and excess debt cap will be lost. This is the case even if there is no change in the ultimate ownership of the CIR group, e.g. where a new top company is inserted by way of share-for-share exchange.
New provisions are being inserted in the CIR rules to allow the unused interest allowance and excess debt cap to be carried forward from an old CIR group to a new CIR group where there is a change in ultimate parent because of a “qualifying takeover”. This term is linked to an existing rule in the “change in ownership” rules and is satisfied, broadly, where the shareholders’ proportional interest in the shareholdings in the new top company mirrors their interest in the existing ultimate parent company of the old group.
The amendments have effect in relation to a change in ownership taking place on or after 29 October 2018.
Time limit for submitting an interest restriction return
Where an entire CIR group is acquired part way through what would otherwise have been the group’s CIR period of account, one of the challenges with the CIR rules is that this will cause the CIR period of account to terminate and therefore accelerate the deadline for filing an interest restriction return in relation to that period.
For example, suppose a group with a 30 September year end is acquired on 31 October 2018 and the accounts and computations continue to be prepared to 30 September. The group would be required to submit an interest restriction return for the one month to 31 October 2018 by 31 October 2019, even though the computations for the period including that one month period are not required to be submitted until 30 September 2020.
Finance Bill 2019 amends the rules so that where a CIR period of account of a group ends solely as a result of the ultimate parent of the group becoming a member of a different worldwide group, within 12 months of the beginning of the affected period, the filing date for the interest restriction return for that period will be the later of (i) the normal 12 month deadline from the end of the (affected) CIR period of account and (ii) 24 months after the beginning of the (affected) CIR period of account.
Following the Finance Bill change, the interest restriction return may typically be filed at the same time as the computations, i.e. by 30 September 2020 in the example above.
The proposed amendment will apply where the existing CIR group is acquired after 29 Oct 2018.