Rising Interest Rates: Potential Impact on Corporate Interest Restriction (CIR)

UK companies are under pressure of rising borrowing costs as the UK’s official base rate of interest rose from 0.25% in January 2022 to 5.25% in August 2023. The existing debt held by companies may have become more costly due to increased periodic interest payments. Also, rising inflationary pressures may compel companies to seek new debt financing which has become more expensive.

For companies that hold inter-company loans at low interest rates, transfer pricing rules would require interest rates to be applied on an arm’s length basis. The companies that are considered large by transfer pricing rules would be required to adjust their rates applicable between unconnected parties.

What is a corporate interest restriction?

Based on the rising interest costs, it is likely more companies would become subject to corporate interest restriction (CIR) rules. CIR rules were introduced by HMRC to restrict the amount of finance costs that a company may deduct in calculating its taxable profits.

A combination of higher financing costs and lower taxable profits would undoubtedly pull more companies into the CIR regime. Under the regime, companies would be required to calculate the disallowed interest and allocate it to the group companies.

The basic rules of CIR

CIR rules are complex to apply. In simple terms, aggregate net interest is calculated by subtracting total interest income from total interest expense. The aggregate tax EBITDA (earnings before Interest, Taxes, Death and Amortization) is calculated after adjusting for several items that include capital allowances, group relief, patent box deduction etc. Interest allowance is calculated using either the fixed ratio or group ratio. The interest disallowed is the difference of the interest expense and higher of:

1. De minimis level of £2 million;
2. Fixed ratio of 30% of tax EBITDA;
3. Group ratio of interest to EBITDA.

CIR reporting

The CIR reporting operates at a group level. A reporting company is nominated to file a CIR return with HMRC within 12 months of the accounting period. A CIR return allocates the disallowance to the group companies. The return is needed to report:

1. Any carry forward of interest allowances
2. Make necessary elections
3. Reactivate any brought forward disallowances

We can help you

In addition to performing corporate interest restriction calculations and annual compliance, we can help assess your group financing structure and debt arrangements to mitigate the impact of the interest restrictions.

Our international tax team have a wealth of experience in assisting multinational companies with their corporate interest restriction requirements. If you have any further enquiries, please get in touch with a member of our International Services team on 01293 227670.