Complying with the CIR can be far from straight forward. This is a large calculation which features a number of newly defined concepts and a new compliance requirement in the form of an Interest Restriction Return (IRR). These complexities have caused many to look for guidance on how to satisfy the requirements of these new rules.
The CIR regime supplants the Worldwide Debt Cap and makes it mandatory for worldwide groups with more than £2 million a year in net tax-interest expense to determine whether or not the restriction applies, and to submit an IRR return. Under the new rules if aggregate net tax-interest expense of the group exceeds interest capacity, the excess is disallowed and must be left out of account in the corporation tax computations of companies in the group. This will require businesses to reconsider how they calculate and allocate group interest.
In this post, we’ll look at the CIR calculation process itself. Whilst the restriction calculation is structurally similar to the debt cap, CIR differs in several important ways.
Recognising that the CIR is a new and complex calculation that will require businesses to build in new processes, we have ensured that the restriction is not only supported in Alphatax, but is backed up with a high-level of guidance when working through the various statements. Tax technical information for each Alphatax statement is supplied via the inbuilt Help system, with explanations on what the inputs are designed to do and how these will affect the computation, in addition to details of the tax technical background behind each calculation with links that refer back to the legislation.
- Group structure: In your group module, you will have an existing group structure but the first task under CIR will be to review which companies are included. The legislation refers to using the basis of consolidation under international accounting standards so you will need to consider the worldwide group as a whole. Alphatax provides you with the flexibility to add companies to the Group module purely for the purposes of the CIR calculation.
- Company values: Three newly defined values as set out in the legislation need to be adopted from the tax computations of the UK group companies. Alphatax will automatically derive these as far as possible:
i) Tax-interest income
ii) Tax-interest expense
iii) Adjusted corporation tax earnings
The definition of tax-interest within the new legislation broadly includes any amounts that would be brought into account under the loan relationships rules. The legislation does separate this definition out into four different streams: loan relationships, derivatives, financing costs, and guarantee income. The legislation also includes the concept of excluded amounts of tax-interest, being things such as foreign exchange gains. The net result of this gives tax-interest income and tax-interest expense and those two amounts are drawn up into the Alphatax group module automatically.
Adjusted corporation tax earnings are defined broadly as any amounts that would be brought into corporation tax under the profits chargeable rules but again with certain exclusions. Tax-interest income and expenses are excluded, as are any capital allowances or balancing charges and certain qualifying tax reliefs such as Research and Development Expenditure Credit or patent box adjustments.
- Differing tax reporting periods: The calculation of the interest restriction applies to a group return period and so where a company has a non-coterminous period, part of that company’s tax amounts are left out of account in the group calculation. Alphatax will automatically apply this treatment using the number of days by default, but override inputs are provided where another basis would be more just and reasonable.
These are tax based considerations, which make up one part of the CIR starting values, but the calculation of a group’s interest capacity also requires amounts drawn from the group’s consolidated accounts.
What needs to be captured here is a measure of the interest included in the worldwide group’s accounts, and of the group’s profitability:
- Interest: is broken down into three flavours starting with net group-interest expense, which is the total of any loan relationship amounts included in the worldwide group’s accounts. That amount is then adjusted according to the legislation to arrive at adjusted group-interest expense and from there downwards to arrive at qualifying net group-interest expense.
- Profitability: is measured by a new concept called group-EBITDA which is defined as profit before tax of the group, plus any amount of net group-interest expense, less an adjustment that removes any depreciation or amortisation included in the group’s accounts.
With these values in hand, the interest capacity of the group can then be derived.
On the Interest capacity statement, the first amount that is calculated is the debt cap for the group, which is the adjusted (or ‘qualifying’ where a group ratio election has been made) net group-interest expense of the group plus any excess debt cap from the preceding period. Alphatax will automatically calculate the amount of the excess debt cap that is going to be carried forward to the next period.
We then move on to the basic interest allowance. This is given by the familiar comparison within the CIR rules, being the lower of the aggregate tax-EBITDA at 30%, and the fixed ratio debt cap. Again, where a group ratio election is made, this percentage is replaced with the group ratio percentage which is the ratio of qualifying net group-interest expense to group-EBITDA. Alphatax will present the calculation under both the fixed ratio method and the group ratio method in order to give you an idea on whether the result would be more beneficial if you made the group ratio election.
Alphatax will then take the appropriate basic interest allowance and derive the interest allowance by including any aggregate net tax-interest income. Unused interest allowance may be carried forward for up to five years, and the result of bringing in any brought forward amount produces the interest capacity for the group.
Does a restriction apply?
We now have all the information we need to determine whether a restriction applies. The Interest restriction return statement will present the aggregate net tax-interest expense for the group and compare this to the interest capacity. If the former exceeds the latter then the legislation defines what is called a total disallowed amount as being the excess. This means that the restriction applies and that amount of tax-interest has to be left out of the account by the UK group companies.
The Statement of allocated interest restrictions shows the total disallowed amount that must be allocated to the companies in the group using the inputs provided. This allocation may be performed in any way the group sees fit, but subject to rules such as that an allocation cannot exceed the net tax-interest expense of any company. The allocation is entered first for the return period of the group and then, for any companies with more than one accounting period within the group period, as a secondary allocation between that company’s accounting periods.
Companies who receive an allocation are required to leave out of account that amount of tax-interest in their tax computation, and Alphatax will automatically post any allocations down the respective companies and apply this treatment.
Unlike the debt cap, one key feature of CIR is that the amount that has been restricted is not lost. The company is allowed to carry it forward indefinitely to be potentially reactivated in future periods.
If for any period the group’s interest allowance exceeds its aggregate net tax-interest expense then an interest reactivation cap will arise. This means that the group will be allowed to reactivate an amount of tax-interest up to that level, and this may be allocated to any companies that have an amount available for reactivation.
Generating the return
Once the calculation of any disallowance or reactivation has been completed, attention will turn to the submission of the IRR. Alphatax will automatically prepare this for you. A ‘ready for submission’ flag is provided which will take the normally detailed report statement disclosure and trim the presentation down to display only the information required under the legislation. This includes standing data such as:
- the name of the ultimate parent of the group;
- the return period;
- a list of the UK group companies that were involved in the restriction along with their UTRs;
- a statement on whether the group is subject to interest reactivations or restrictions and the total disallowed amount or interest reactivation cap;
- and, details of any elections that the group has made in drawing up their interest restriction return.
A Statement of calculations is also included which lists some of the key calculation values used in determining whether a restriction or reactivation applies, and the Statement of allocated interest restrictions or Statement of allocated interest reactivations may be included to present the respective allocations. This return may be printed directly from Alphatax for submission to HMRC.
An abbreviated form of the IRR is also available for groups that were not subject to restrictions or reactivations.
There are a number of steps to be considered within the CIR calculation but using Alphatax makes it far simpler to navigate this process. Alphatax will automatically populate fields whenever possible, override or adjustment capabilities are provided where necessary, information is carried forward when relevant, details of the various elections available and their effect are noted, a range of diagnostics will highlight unexpected or disallowed entries, and the statements are designed to link the calculation process together and are all signposted with references that correlate directly to the legislation.
Going forward, we’ll be providing information on how to apply the restriction in our ‘New User’ and ‘Refresher’ training courses provided by our Professional Services team. In the meantime, to see a practical demonstration of CIR within Alphatax, check out our webinar here.