Don’t forget Corporate Interest Restriction (CIR) rules

The ongoing relevance of the Corporate Interest Restriction rules

What is the Corporate Interest Restriction?

The Corporate Interest Restriction (CIR) rules are designed to limit the amount of interest expense that companies can deduct from their UK taxable profits. The CIR potentially bites where UK “aggregate net tax interest expense” is above £2 million per annum within a ‘CIR group’. Interest expense, in this context, includes various finance costs, including loan relationship and derivative contract debits.

Introduced in the UK as part of the Finance (No.2) Act 2017, the CIR rules have their roots in global efforts to limit the use of excessive, often intra-group, interest payments to reduce tax liabilities in higher-tax jurisdictions. Transfer pricing rules and a number of other purpose driven tax tests have sought to deal with this for years. But CIR is in addition to these, and goes further; applying to UK-only companies and groups and can lead to interest restrictions for genuine third party debt, depending on the group structure and its UK EBITDA.

This is enforced by essentially capping net interest expense above £2 million at the lower of either 30% of a group’s UK taxable earnings before interest, taxes, depreciation, and amortization (EBITDA) or a “debt cap” based on group-wide aggregate net interest and prior year positions. Alternative calculations can be applied in some circumstances.

CIR Group

The CIR rules can significantly increase corporation tax exposure, so groups AND standalone entities should carefully consider how they are affected. The number of UK companies with interest costs, and the ‘CIR group’ to which they belong, will impact ratios and capacity.

CIR Still Matters

After a period of prolonged inflation and high interest rates, many businesses are suffering a high interest environment, either through variable rates or high fixed-rate borrowing. This is particularly true of businesses in the Real Estate sector, which can often be highly leveraged as a result of the financing demands and structures involved. The £2 million threshold has, however, not been increased since the CIR rules were introduced. As a result, interest expense on large lending on both Real Estate developments and investments can quickly exceed the threshold as it applies across UK group companies as a whole.

If the threshold remains at £2m, CIR will continue to be a significant consideration to UK corporates for several years to come.

How to deal with CIR

The CIR legislation, and its interaction with other areas of the corporate tax code, is complex and we can only set out a high-level overview here. The best approach is to seek professional advice whenever debt is being considered.

Our Corporate and Business Tax team are here to support you with the application of the UK’s CIR rules and navigate this regime.