For many businesses, borrowing is a normal part of growth. Whether it’s funding an acquisition, investing in new premises, or supporting expansion plans, interest on that borrowing is usually deductible for corporation tax purposes.

However, since 2017, the UK’s Corporate Interest Restriction (CIR) regime has limited the amount of tax relief some businesses can claim for interest and other financing costs. The rules were introduced to prevent large groups from reducing their UK tax bills through excessive debt funding.

What is the Corporate Interest Restriction?

The CIR rules limit the amount of corporation tax relief a company or group can obtain for interest and certain financing costs.

Broadly, the rules compare a group’s financing costs with its taxable profits. If financing costs are considered too high relative to the group’s UK activities, part of the interest deduction may be restricted.

Does it affect every business?

There is a helpful de minimis threshold of £2 million per annum. If a worldwide group’s net interest and financing costs are below this level, the CIR rules will generally not restrict relief.

As a result, many owner-managed businesses and smaller groups have little day-to-day interaction with the regime.

However, larger groups, expanding businesses, property groups, and businesses carrying significant external or shareholder debt should consider their position carefully.

Which costs are included?

The rules extend beyond simple bank interest.

They can potentially apply to:

• Interest on bank loans
• Intercompany financing costs
• Certain alternative finance arrangements
• Financing elements of lease arrangements
• Certain derivative financing costs

This means businesses can find themselves within the regime even where traditional borrowing is relatively modest.

How is the restriction calculated?

The detailed calculation is complicated, but the basic concept is straightforward.

A group’s deductible financing costs are compared against an “interest allowance”. The allowance can broadly be calculated using one of two methods – the fixed ratio or group ratio method. Each business is free to use whatever method gives them the greatest amount of relief.

What happens if a restriction arises?

If financing costs exceed the available allowance, part of the interest deduction is disallowed for the period.

Importantly, this does not always mean the relief is lost permanently.

In many cases, restricted amounts can be carried forward and potentially relieved in future years if sufficient capacity becomes available.

Similarly, unused interest capacity may be carried forward in certain circumstances, which can be valuable for groups expecting future growth or increased borrowing as, while they may not currently exceed the £2 million threshold, the additional interest capacity brought forward may reduce their restriction when they do exceed this threshold.

Practical points for directors and finance teams

The CIR regime is rarely something that can be left until the corporation tax return is prepared.

Businesses should consider the rules early where they are:

• Taking on significant new borrowing
• Undertaking acquisitions
• Refinancing existing debt
• Experiencing substantial changes in profitability

Early modelling can identify potential restrictions and allow groups to assess alternative financing structures before problems arise.

How we can help

If your business is carrying substantial debt, undertaking acquisitions, or experiencing rapid growth, it is worth reviewing your position early. A proactive review can often avoid surprises and ensure valuable tax relief is not lost or deferred unnecessarily.

(E) enquiries@advaloremgroup.uk (T) 01908 219100 (W) advaloremgroup.uk