Taming the monster that is Corporate Interest Restriction
Neil Insull looks at the Corporate Interest Restriction (CIR) tax rules
With the Bank of England base rate rising to 5% in June, UK corporate borrowers will of course be feeling the pain of significantly higher finance costs.
And to rub salt into the wounds, many of these borrowers will, for the first time, be facing an even higher post-tax burden of borrowing by being denied tax relief on a substantial part of their interest costs.
Introduced in April 2017, the Corporate Interest Restriction (CIR) tax rules are how UK groups are, in broad terms, restricted on interest deductions to 30% of earnings, subject to an automatic deduction of up to £2 million.
The CIR regime is the third major weapon in the Government’s armoury (alongside its thin capitalisation and anti-hybrid rules) to deny what might be described as ‘excessive’ relief in the UK for the cost of corporate debt.
However, unlike the thin capitalisation rules, which not unreasonably seek to disallow interest on borrowings which would not be available from a third-party lender, the CIR rules use an arbitrary measure of what is a ‘reasonable’ level of lending and have set a fixed £2 million interest limit without reference to current interest rates nor the level of the base rate.
When the £2 million limit was introduced in 2017, the base rate was just 0.25% and a UK bank was lending (on a secured loan) at a rate which could be below 3%. A UK group could therefore borrow £66million without risk of interest being disallowed under CIR. Today, however, with commercial interest rates rising to over 9%, the CIR rules are now biting once debt for a UK group reaches £22 million. So not only do we have the prospect of UK companies bearing higher long-term finance costs but those costs being 25% higher to the extent the costs are not tax deductible at the current Corporation Tax rate of 25%.
With the Government exploring every means to secure higher tax receipts from UK corporates, there seems little chance of this, or the next, administration making changes to the CIR rules. The regime is here to stay, and with that more and more companies need to understand the impact of the CIR rules.
From its complexity (the legislation is over 500 pages) to the means to mitigate its impact through the appropriate elections and managing the allocation of the disallowance across the group, CIR is no doubt a monster. But it can be tamed.
Would you like to know more?
If you would like to discuss any of the above in more detail, please contact your usual Blick Rothenberg contact, or Neil Insull using the form below.