The Corporate Interest Restriction (“CIR”) was introduced in 2017 for UK companies and groups with a net interest cost above £2m with the purpose of aligning the size of interest deductions to the size of a business’ underlying activity. Its reach and impact are wider than ever.
What is the background?
While regarded as conceptually simple by linking the extent to which UK borrowing costs are deductible to a proportion of UK taxable profits of the borrower, the detailed operation of the CIR rules is anything but that, with the primary rules spanning 11 chapters and the supporting guidance running to hundreds of pages.
However, as 3-month LIBOR hovered around 0.3% to 0.4% in 2017, the level of debt required for businesses to incur the pre-requisite net interest costs of £2m per annum for CIR to apply tended to be very large.
Additionally, when CIR went live in April 2017, HMRC gave it a pragmatic “soft landing” – extending early deadlines, allowing light-touch/abbreviated filings, and applying a reasonable-excuse approach to penalties – so compliant groups could bed the regime in without tripping up on admin.
What is the issue?
Although there have been many changes to the CIR rules since 2017, the two most significant CIR developments have not resulted from a letter of the rules being changed.
Firstly, borrowing rates are now much higher. The Bank of England’s SONIA interest rate benchmark that replaced their former interest rate benchmark LIBOR is now almost 4%. Put simply, a UK company or group borrowing at 200 basis points over LIBOR in 2017 would typically need a little over £80m of net borrowing to have breached the £2m borrowing costs threshold over which the CIR rules begin to apply. Now, if that same business is borrowing at 150 basis points over SONIA, the amount of borrowing that would trigger application of CIR is less than half of that needed at the outset of CIR to have breached that threshold.
Secondly, HMRC first signalled the end of the CIR soft landing in 2023 and, after some very substantial investigations and subsequent engagement with bodies like the Chartered Institute of Taxation, they have indicated that for accounting periods ending after 31 March 2024 (first filing deadlines typically 31 March 2025), they will be applying the rules rigorously.
What does this mean for corporate taxpayers?
The good news is that the CIR rules, although complex, are now relatively stable. It should be possible to confidently plan and predict the impact of CIR and take advantage of relieving provisions included in the rules that are specifically designed to mitigate the effect of CIR on commercial borrowing.
However, the correct detailed operation and application of the CIR rules, including observing all administrative obligations, are crucial. UK companies that fall within CIR and do not rigorously take all necessary compliance steps may find their deductions for borrowing costs reduced to a small fraction with consequential and seriously adverse cash tax and tax reporting implications.
How can UNW help?
UNW CIR Specialists have considerable experience of successfully supporting clients working with the CIR rules since they were first introduced in 2017, including advice on and implementation of the relieving rules, compliance, forecasting and reporting.
We are on hand to support clients on all aspects of UK interest deductibility, including CIR. If you would like to discuss how we can help you, or have any other related queries, please get in touch with your contact at UNW in the first instance.
