Corporate interest restrictions provisions – dealing with collective investment schemes and accounting differences

Wed 20 Dec 2017

The Corporate Interest Restriction rules represent a significant change to the tax rules for deducting interest expense for companies.  Whilst the legislative changes were not enacted until the Finance (No 2) Act 2017 received Royal assent on 16^th November 2017 they are effective from 1 April 2017.

Following consultation regulations have been issued to refine the operation of these rules in two specific sets of circumstances. The regulations come into force on 29 December 2017, but have effect from 1 April 2017.

Collective Investment Schemes

SI 2017/1227 has been issued to deal with the application of corporate interest restriction rules to collective investment schemes.

These regulations exclude interest distributions by AIFs (authorised investment funds), PAIFs (property authorised investment funds), TEFs (tax elected funds), and Investment Trusts from the definition of ‘tax interest expense’ amounts for the purposes of the corporate interest restriction rules. The regulations also deal with the profits of those taxed under the Securitisation Companies 2006 Regulations for the purpose of the corporate interest restriction rules.

Accounting Differences

SI 2017/1224 has been issued to deal with accounting differences that can affect the application of the corporate interest restriction rules, due to the different method of accounting for loans at an entity level and on a group basis and also with pension contributions.

The regulations apply where:

• A loan on commencement is recognised at fair value in the group financial elements but amortised cost in the financial statements of the issuer company.
  • The regulation treats the loan as accounted for at amortised cost basis in the group financial statements for the purpose of deriving the various corporate interest restriction thresholds and amounts.
• In a debt buy back situation: where what was a loan with a third party, became an intragroup loan prior to commencement of the CIR rules, but still exists between two group members, the two group companies may account for the loan at different values. Thus no gain or loss is recognised at the entity level when the loan becomes a group loan, but the difference in value is recognised gradually over the life of the loan as a differential in effective interest rate between the two loans.
  • The regulation provides that the gain or loss is to be treated as recognised in the financial statements of the worldwide group over the remaining term of the loan on a just and reasonable basis.
• Finance charges arise with respect to certain finance arrangements in connection with a pension contribution paid by an employer (employer asset backed pension contributions).
  • Where a finance charge arises in connection with an acceptable structured finance arrangement and the finance charge arises from a deemed loan relationship under CTA 2010 part 16 s.761, s.762 s.766, or s.769 (dealing with disposals of income streams) is a tax interest expense, but is not otherwise recognised as a ‘relevant expense’ in the financial statements of the worldwide group, it is treated as so recognised for group interest and group EBITDA purposes.

To discuss how the corporate interest restriction rules affect your business and what you should be considering with respect to these rules, please get in touch with a member of the Mazars corporate tax team.