Corporate Interest Restriction rules: a guide

/ 26 November 2023

Helena Kanczula

From 1 April 2023 the rate of corporation tax (CT) has increased from 19% to a maximum of 25%.  This is at a time when interest rates have also increased, meaning more companies are at risk of being drawn into the complex Corporate Interest Restriction (CIR) rules.  If full relief cannot be obtained for finance costs as a result, this pushes up effective CT rates.

If your company has profit levels which are uncertain, the CIR rules can be difficult to plan around.  This article will give you guidance on how the legislation operates, some of the technicalities which can be misunderstood, and whether there are any aspects of the legislation which could help manage the position.

Affected companies

The CIR rules apply to a standalone company or group with net interest expense of more than £2m incurred by companies in the charge to UK CT. The limit has not changed since the commencement of the rules from 1 April 2017. The current base rate is 5.25%, compared that to the March 2017 rate of 0.25%, meaning some commentators are calling for an increase in the de minimis level.

In March 2023, HMRC estimated that 6,800 companies were within the CIR rules. The likelihood is that as interest rates have increased, this number has grown. Although the rules are primarily targeted at restricting deductions for related party debt, the use of third-party loans does not always mean full relief is available.

Calculation steps

For companies which may be affected for the first time, the rules can be difficult to apply but ultimately could result in a proportion of finance costs being added back and carried forward.  There is limited scope to utilise disallowed amounts and it is therefore imperative that the calculations are carried out accurately to ensure relief is maximised.

There are several separate steps to the calculation process. Broadly:

  • Step 1 entails defining the group
  • Steps 2-6 entail calculations, culminating in the ‘disallowed amount’
  • Step 7 entails allocating the disallowed amount

The disallowed amount for affected companies is calculated at the group level and summarised by a formula:

Disallowed amount equals:

  • Aggregate Net Tax Interest Expense (Step 2, as explained below)
  • minus Interest Capacity (Steps 3-5, as explained below)

One difficulty with understanding the legislation is the volume of terms and abbreviations, many of which look similar and are of little help to practitioners and their clients.  A very basic example is provided in the illustrated example below.

Step 1: What is the group?

For the rules to apply, a group may not even be required: the £2m de minimis limit breach is the trigger.  A standalone company with a large net interest expense is referred to as a ‘single-company group.’

A single company group may well be advised to file CIR returns to make relevant elections and avoid tax inefficiencies over future periods, even where it may not be immediately obvious that the rules apply or will apply in future.  Again, it is essential to carry out planning.

For a more traditional group, you need to look at the consolidated accounts position to determine which companies will be affected and how some of the calculations will be prepared.  A group consists of its parent and consolidated subsidiaries. Transparent entities such as limited liability partnerships could be a parent entity provided no participator holds more than 10% (by value) of the shares.  The HMRC Corporate Finance manual (CFM) covers a lot of these points clearly; we refer to specific sections during this article.

We are therefore normally looking at the consolidated group accounts to identify the relevant entities.  However, where subsidiaries are held at fair value e.g. a parent company is an investment entity under IFRS 10, it is probable the subsidiaries will be treated as their own standalone group for CIR purposes.

For the UK workings (Steps 2 and 3 below) the fully consolidated companies are the subject of the calculations.  They include UK branches of overseas companies and also non-resident landlord companies which derive income from UK real estate.  Further calculations are then carried out at the identified group level (see Step 4 onwards). These steps require a complete understanding of the financing requirements of the entire group.

Step 2: Is the Aggregate Net Tax Interest Expense (ANTIE) more than £2m?

Here we are looking at the fully consolidated companies which are within the charge to UK corporation tax to determine whether, in the absence of the CIR, ANTIE in the UK would be more than £2m.

ANTIE = Sum of net interest expense minus Sum of net interest income of the relevant companies

The first point is that the accounting period of the parent company will be followed for the purposes of the CIR. In most cases this will be the same as that for the UK subsidiaries but if not, some apportionment for results of the UK companies may be required.  Similarly, for joiners and leavers during the CIR period, apportionment will be required.

‘Net Interest Expense’ broadly refers to loan relationship debits and credits and therefore captures more costs than just pure interest but for ease, we refer to interest in this article.  Other amounts include:

  • Legal fees incurred in respect of the raising of loan finance
  • Discounts on certain lending arrangements;
  • Finance leasing costs which are within the loan relationship rules

That list is not exhaustive, but the key issue is that UK interest, is calculated on the basis of the UK corporation tax rules rather than as accrued in the accounts.  Such adjustments might include those for transfer pricing, hybrid mismatch rules and other rules which deny or defer relief until a later period.

For interest income, the HMRC manuals also provide an example of the adjustment which may be required if withholding tax has been suffered on interest income (see CFM95680).  Essentially this adjustment recognises that UK tax is lower because income tax has been suffered overseas and the ‘notional’ interest income on which tax has been paid is taken out of the calculations.

Interest expenses and income specifically exclude certain amounts which are technically within loan relationship rules.  ANTIE does not therefore include foreign exchange movements. Impairment losses are also excluded.  Part of the reason may well be to capture only those costs which are more predictable and to avoid companies inadvertently falling under the rules.

Step 3: Calculate the Aggregate Tax EBITDA for each company in the charge UK tax

The UK EBITDA figures calculated using corporation tax principles will ultimately be used in the calculations to work out how much of the Step 2 ANTIE is disallowable.

In practice, this generally means that net income charged to tax and taken from the UK tax returns will be adjusted for various amounts including interest, depreciation, loss reliefs and capital losses to arrive at a figure which resembles normal accounting EBITDA which is adjusted for permanent differences excluding those relating to costs such as non-deductible depreciation.

More complex adjustments include those required for interest income on which overseas tax has been suffered.  When income arises in a foreign jurisdiction to a UK resident company, and that income is taxed in that foreign jurisdiction, the UK may give relief for the foreign tax suffered by crediting the foreign tax against the UK tax charged on that income. Where a credit is given under TIOPA10/S18, an adjustment should be made to the amount included in tax-interest to take account of the foreign tax suffered (see also CFM95680 which explains clearly how this adjustment interacts with the Step 2 adjustment).

Other adjustments include deductions for relief on R&D and other tax reliefs to ensure the CIR does not dimmish the effect of those regimes (see CFM95735 onwards).

Step 4: Calculate the Basic Interest Allowance (BIA) and, if relevant, the Interest Allowance (IA)

At Step 4 we need to use the amounts derived at Steps 2 and 3 but also need to look at the wider financing of the consolidated group which may include companies which are not in the UK.

This is where some of the terminology can cause most confusion.  The IA will in most cases be the same as the BIA.  The only time it would be different would be for a period in which there is net interest income for UK companies, instead of expense which may impact on some of the carry-forward amounts.  As it is unusual to have groups which are affected by the CIR to have net UK interest income for a period, we will assume that IA and BIA are the same across all periods.

It is broadly at this stage that companies can ascertain whether part of the ANTIE is likely to be disallowed i.e. ANTIE is greater than the BIA.

If ANTIE is less than the BIA for a period, and therefore a full deduction has been claimed, there is excess capacity which can be carried forward for a period of five years and may then create some additional relief for interest.

Standard basis: Fixed rate method (FRM)

The starting point to determining the BIA under the FRM is to use the better known ‘30% rule’ whereby the Step 3 Tax EBITDA is multiplied by 30%.  More sophisticated the tax software will usually calculate this automatically by pulling together the results for the group.

This figure provides the maximum deduction which could be claimed under the FRM.  It is a maximum, as the group must compare this figure with the level of external interest for the entire worldwide group.  The worldwide figures are taken from the consolidated accounts rather than figures from overseas tax returns – which, to an extent, simplifies matters for groups which operate cross-border.  This gives the figure for ‘net group interest expense’ (NGIE).

Various adjustments are made to NGIE per the consolidated accounts to ensure that the measure of external interest is not overstated and is broadly calculated on the same basis as net interest is calculated in the UK tax returns.

Fixed ratio debt cap under the FRM

If –

  • Adjusted net group interest expense (ANGIE) plus excess debt cap (EDC)
  • is lower than 30% multiplied by aggregate tax EBITDA

– Then the lower amount is the maximum deduction.  EDC will be explained below.

Election basis: The Group Ratio Method (GRM)

For groups which are very heavily geared, HMRC provide the opportunity to elect for an alternative basis and the UK-EBITDA can be multiplied by the group ratio rather than the fixed 30%.

Again, the figures to calculate the group ratio and the maximum level of deduction are taken from the consolidated accounts.  The ratio which is derived is then applied to the UK EBITDA (Step 3) figure.

The Group Percentage = Qualifying net group interest expense (QNGIE)divided by Group EBITDA multiplied by 100

QNGIE is broadly based on ANGIE but specifically excludes related party debt.  The definition of related parties is broad and can extend to interest on third-party loans on which guarantees have been provided [from?] relevant persons.  HMRC’s guidance at CFM96200 onwards is a good summary on the types of interest which might be excluded.  It explains matters such as the 25% investment condition and when the rights of other persons should be attributed to determine whether parties are related.

If a group has largely been financed by shareholder debt, this would be a good indication that the GRM may not be preferable.

The Group EBITDA figure used in the formula above should be relatively clear from the consolidated accounts, although an understanding of the structure of the group is needed as there may be elections which could improve the ratio (see below).  Ultimately, if this ratio is less than 30%, the GRM would not generally be appropriate.

Similar to the FRM, the interest deductions are restricted to QNGIE plus the EDC (see below), if this calculation gives a lower number than the figure using the group percentage.

Step 5: Calculate the Interest Capacity (IC)

Again, the abbreviations will confuse but if –

  • The IA (Step 4) plus any unused allowance (see below) is less than £2m

– a group would still be entitled to deduct the de minimis amount of £2m.  This ensures that in most cases groups with lower levels of EBITDA and/or modest levels of net external finance are not put in a worse position than groups with net interest expense of no more than £2m.

There are technicalities around the public benefit infrastructure election which mean there will be some cases where the availability of the de minimis is at risk. We will discuss this in more detail in a later article.

Step 6: Almost there! Calculate the disallowed amount

The disallowed amount of interest is then derived for the accounting period:

Disallowed amount = ANTIE (Step 1) minus IC (Step 5)

If capacity exceeds ANTIE, there may be scope to use brought-forward disallowed interest from previous periods.  This excess is calculated at group level and, as stated, can be carried forward for five years.

In theory, provided Steps 1 to 5 have been properly calculated, Step 6 should be straightforward to arrive at.

Step 7: Allocate the disallowed amount to companies with net UK interest expense in the most beneficial way

Provided the relevant administrative requirements have been complied with, such as the nomination of a reporting company, a group may be able to allocate any disallowance across UK companies in the most beneficial way.  This may include, for example, the allocation to UK companies which have tax losses or losses brought forward which are accessible.

The disallowed amounts are carried forward at company level indefinitely.

Complex aspects of the CIR

Calculation of the EDC to carry forward to next period for its calculation of BIA (Step 4)

One area which does case confusion is what exactly the EDC is, and how the carry-forward works.  This is different to the unused interest capacity which can arise when ANTIE is lower than the BIA (or lower than the IA, if relevant).

In outline, it is calculated each period but can be used to increase the level of ANTIE which is deductible for a period.  This will not always be the case, but it is based on a further ‘lower of’ calculation, the measures used depending on whether the FRM or GRM is used for the current period.

If the FRM is used, the EDC carried forward to the next period is the lower of:

  • ANGIE minus 30% multiplied by Tax EBIDA; or
  • The Step 6 disallowed amount plus the amount brought forward from the prior period

Therefore, a situation can arise under which ANGIE on its own would have been lower than 30% multiplied by Tax EBITDA.  However, if –

  • ANGIE plus EDC brought forward
  • is greater than 30% multiplied by Tax EBITDA,

– This will increase the level of deductions accordingly.


The above example shows a very basic situation, and assumes no EDC brought forward.  In this case, because the group is also funded by related party debt, the UK companies would be advised to use the GRM.


Although HMRC were originally on record as indicating that very few groups would be adversely affected, what is clear is that the level of compliance required does continue to cause issues, even though the rules have been with us since 2017.  Complications arise when deadlines are missed as they are very inflexible.

Indeed, HMRC have recently tightened up their approach to helping companies affected as the view is understood to be that by now, taxpayers and their advisers should understand what their obligations are.

To benefit from the ability to allocate disallowed interest in the most beneficial way, a group would generally need to appoint a reporting company within 12 months of the relevant return period.  HMRC have discretionary powers to appoint a reporting company if this deadline is missed.  HMRC have indicated that they will take a more restrictive approach in this regard.

Issue 109 of the HMRC Agent Update (June 2023) clarifies the circumstances in which HMRC will apply their discretionary powers.  The bad news is that if a reporting company is not active, any disallowance is applied on a pro rata basis and a group may also lose out on making some of the preferential elections within the relevant time limits, which differ depending on the case.

How can the position possibly be improved, or issues be avoided, for groups that are in the CIR rules?

  1. Elect for the GRM

As above, for highly geared groups, it is recommended that a review be carried out to determine whether the GRM method should be applied.  A group is not bound to use the GRM for every period and therefore, if the group’s funding requirements change, there is scope to apply an alternative method.

  1. Review prior year CT returns

For larger groups, it may be appropriate to seek to revise prior year CIR returns.  A revised return must be submitted within 36 months of the end of the period to which it relates.  This limit is subject to an extension for the submission of a full interest restriction return in place of an abbreviated return to five years.  This allows groups to access unused interest allowance.

There is scope to amend the underlying tax returns, which is usually within three months of the date of the amended return (see CFM98535) and there is limited scope for to apply for late claims such as group relief (see CTM97050 which relates to Statement of Practice 5/01 which is referred to under CFM98645).

  1. If ANTIE is lower than £2m, is it ever worthwhile submitting returns?

We have flagged previously that there may be cases when specific elections need to be made even though relevant finance costs may be lower than £2m.  One case is where interest has been capitalised.  We are primarily looking at companies where interest is included in a figure for stock such as a property development company which has chosen to capitalise its interest in this way.

The issue is that the adjustments to the group calculations may require the figure for group interest such as the ANGIE to include interest at the point at which it is capitalised rather than when it is released to the P/L.  For UK-only groups or standalone companies which are expected to have ANTIE in excess of £2m in a future period e.g. on the sale of a property, this creates a problem.

Help is at hand in the form of an irrevocable election which eliminates this mismatch.  This election is also relevant to other timing differences.  This is more likely to affect UK-only groups rather than large worldwide groups and as the election is irrevocable, care should be taken over whether the election should be made.

The election can be made in an abbreviated return which could reduce administration.  However, as above, care is now needed in terms of timing to ensure groups appoint reporting companies within the relevant deadline and make this election, usually required within 12 months of the end of the relevant period.

  1. If we use the group accounts to calculate some of the external cap amounts, the group ratio calculation is badly affected because it includes the results for joint ventures (JVs) which are not consolidated

Again, a specific election can be made which strips out the net result for JVs so that the relevant percentage of their interest expense and EBITDAs can be recognised and a more favourable GRM percentage can then be derived.

This again requires a detailed understanding of the group.  This election is not irrevocable.

  1. On a transfer of trade, can a company transfer disallowed interest to the successor company in a similar manner to the way in which losses are transferred?

No, there is no provision for the disallowed interest to be transferred and groups should be aware that the disallowed amount could expire if there is a cessation of trade.  This may be an example of a case where a revised CIR return could be submitted and for there to be a reallocation of disallowed amounts to other group members, if there is capacity.  HMRC have not indicated that they are minded to increase the £2m de minimis limit. This may be because other countries have set their limits at similar levels.  The rules are complex: there is some opportunity to manage the position through some of the elections and also revisit prior year returns to ensure that relief is maximised.

For detailed guidance on how the CIR applies to your situation, please get in touch with your usual BKL contact or use our enquiry form.

Watch our 2023 webinar on corporate tax issues amid rising interest rates:

Helena Kanczula

Tax Director

T +44 (0)20 8922 9073
E Helena.Kanczula@bkl.co.uk

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