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UK: Corporate interest restriction

UK: Corporate interest restriction

This week’s article looks at the debt cap when applying the fixed ratio method


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In the second of our series of articles looking at the new corporate interest restriction regime which applies from 1 April 2017, this week we look at the debt cap when applying the fixed ratio method. Interest is disallowed to the extent 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 partly calculated by reference to the fixed ratio debt cap limit which is based on the net finance expense in the group accounts. When calculating the debt cap limit, adjustments may be required to the figures recognised in the group income statement. An election can be considered to make further adjustments, which may be beneficial but will result in an additional compliance burden.

Under the fixed ratio method, the interest capacity is based on 30 percent of the aggregate tax-EBITDA (taken from the computations) or, if lower, the fixed ratio method debt cap limit, but is never less than £2 million.

Debt cap

The fixed ratio method debt cap is intended to ensure that the UK tax deductible interest expense does not exceed the interest expense of the worldwide group.

It is a measure of the group’s net financing cost in the income statement in the group accounts. This can be contrasted to the worldwide debt cap rules which use a measure of the group’s gross finance charge.

The finance charge in the group accounts must be adjusted for certain matters such as the following:

  • Amounts from certain derivative contracts recognised in group profit and loss must be replaced with the amounts which would be brought into account for tax purposes if the Disregard regulations were applied to the group as a whole; and
  • Interest like amounts which are added to the carrying value of assets (e.g. trading stock, shares or a property) are included in the debt cap when recognised in the group balance sheet and excluded when expensed in group profit or loss.

Interaction with brought forward disallowed interest

The net tax- interest expense which has been disallowed under the corporate interest restriction rules can be carried forward indefinitely and utilised in a later period subject to the limits applying for that later period. Where this is the case, there are some complicated rules which may have a beneficial impact by increasing the debt cap limit in a later period, thereby potentially permitting the disallowed interest to be utilised in a later period.

Election to amend the debt cap limit

An election can be made which amends the debt cap limit as follows:

  • For assets and liabilities where the profit or loss falls to be calculated in accordance with GAAP, e.g. stock, the effect of the election is that capitalised interest is included in the debt cap limit when recognised in group profit and loss and not when capitalised in the group balance sheet. This adjustment is required for all such capitalised amounts, not just those relating to UK group companies; and
  • The debt cap limit is adjusted for amounts that would be recognised for UK tax purposes in respect of changes in accounting policy in the group accounts making the assumption that the group is a company within the charge to UK corporation tax. The election is made as part of the interest restriction return which will normally be filed within 12 months of the end of the period. Accordingly, it will be possible to use some hindsight in determining whether this is expected to be beneficial. The election does not need to be made for the first period under the new rules but, once made, is irrevocable, so applies to the period for which it is made and all future periods.

Making the election has wider implications, e.g. to the group ratio method, and so should be considered carefully. Both the mandatory adjustments to the accounting numbers and the effect of the election will add to the compliance burden. If you have any questions about the impact these rules may have on your business, then please get in touch with one of the named contacts or your usual KPMG contact. 


For more information, contact a tax professional with the KPMG member firm in the UK: 

Rob Norris | Rob

Mark Eaton | Mark

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