If you dare to read HMRC’s 489 page guidance on the recently introduced corporate interest restriction rules, then the answer is probably…yes! As we approach nearly 12 months since the introduction of the new rules, I thought it would be useful to share what I have learnt so far.
As expected, the majority of small and medium-sized enterprises (SMEs) have benefitted from the £2m de minimis allowance. When the group’s net tax interest charge is less than £2m then there is no restriction to consider.
In the cases I have reviewed where the group’s interest charge exceeds £2m, the default ‘fixed ratio rule’ results in a calculated restriction. The fixed ratio is defined as being 30% x tax earnings before interest, taxes, depreciation, and amortisation (EBITDA). However, the group ratio rule has come to the rescue to ensure that no restriction is ultimately suffered. It is vital to remember that an election has to be made – failure to make the election can be costly.
Even when the group consists of UK only companies, it is possible that the group will suffer a restriction. This is because the fundamental core of the calculation of the group ratio is based on accounting entries whereas the fixed ratio is simply 30%. Significant timing differences between accounting and tax figures can therefore give rise to a restriction in the period. It is possible to make an election (yes another election!) to use the alternative calculation of the group ratio if this results in a better position.
Groups should consider filing an abbreviated return, even though no restriction is suffered in the year. The reason being that it allows the group to carry forward any unused allowance to a future period. For example, if tax interest in the year is £1.7m, then the unused allowance compared the £2m de minimis is £0.3m. This can be carried forward up to five years in order to increase interest capacity in a future year. If no abbreviated return is required, then the opportunity to carry forward unused capacity is lost.
If a restriction does apply, then the disallowed amount must be allocated to group companies. The amount disallowed is then taken as a tax deduction in a future year when capacity allows. This is an ‘asset’ of the company in question and thought has to be given to whether a deferred tax asset should be recognised.
One difficulty that arises in assessing the application of the rules, is the availability of information. For example, if acting for a single UK company of a worldwide group, a copy of the group’s consolidated accounts is required in determining the group ratio. Those accounts may need to be restated in a format acceptable to HMRC, e.g. UK GAAP, which is easier said than done.
Although the majority of SMEs are currently unaffected as a result of the £2m de minimis, upon reflection, the £2m limit seems to be relatively modest in the context of reasonably large medium-sized companies. In a period where interest rates are likely to go up and uncertainty remains around Brexit, it is not unreasonable to predict that more groups will need to at least consider the application of these rules to their corporation tax position.