Are you up to date on the UK's new rules on corporate interest restriction? From 1 April 2017, UK companies that claim tax deductions on interest expenses have a new set of rules to apply.

What is CIR?

From 1 April 2017, UK companies that claim tax deductions on interest expenses have had to consider a corporate interest restriction (CIR) regime, which disallows interest-like expenses in some cases (when the net tax-interest expense exceeds the interest capacity). The UK government, which introduced the legislation in 2017, says the aim of the regulation is to “restrict a group's deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking into account how much the group borrows from third parties”. However, companies with less than £2 million of net interest expense and other financing costs per year are not subject to the restriction.

According to KPMG, the legislation introduced a large number of changes, including:

• income and expenses from derivative contracts which hedge risks arising in the ordinary course of a trade, where the contract was not entered into in relation to the capital structure, will not be included under the definition of interest-like expenses subject to the restriction;
• interest-like expenses which have been disallowed under the CIR rules can be carried forward to the next tax period;
• under the new rules, derivative contracts are treated as loan relationships and expenses subject to restriction include those incurred in bringing the derivative contract into existence.

There's more detail on all the changes under the new CIR regime in this article by KPMG.

Extra reading on CIR

The consultancy group has actually produced a useful series of articles on this topic and the latest, warns that the 'devil is in the detail' of the CIR regime, particularly with regards to derivatives contracts.

It includes details on derivatives that are within scope of the new CIR rules, including the following, which are either included or excluded in respect of derivatives:

• include debits and credits from derivative contracts which relate to interest, currency and index of prices or corporate debt;
• exclude debits and credits from derivative contracts which hedge risks arising in the ordinary course of a trade where the contract was not entered into in relation to the capital structure of the worldwide group; and
• exclude debits and credits in respect of an exchange gain or loss.

More information on CIR with regards to derivatives contracts (and links to KPMG's other articles in the CIR series) can be found on the consultancy's website. 

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CTMfile take: This is certainly a regulation that tax professionals need to know about but treasurers and CFOs, with their knowledge of derivatives contracts, are likely to be called on to provide expertise within the company.