Restriction on Corporation Tax relief for interest deductions

Introduction

When you calculate how much UK Corporation Tax your company or group has to pay, there’s a limit (known as a Corporate Interest Restriction). This limits the amount of tax relief you can get for deducting net interest and other financing costs.

This Corporate Interest Restriction only applies to individual companies or groups of companies that have net interest and financing costs of over £2 million in a 12-month period.

If your company’s or group’s net interest and financing costs are restricted, you should appoint a reporting company within 12 months of the end of the period of account. The reporting company must then submit a Corporate Interest Restriction return.

If your net interest and financing costs are less than £2 million

Your company or group does not need to submit a Corporate Interest Restriction return. However, you must keep documents that show that your company or group will not deduct more than £2 million in net interest and financing costs in that period of account.

You can still appoint a reporting company, this company must then submit an abbreviated return. To reduce a future interest restriction, you can carry forward unused interest allowance for up to 5 years by replacing the abbreviated return with a full return for that period of account.

If your net interest and financing costs are more than £2 million

You must work out your company’s or group’s ‘interest allowance’. This is the maximum amount of net interest and financing costs your company or group can deduct in a period of account.

You can use the ‘fixed ratio method’ or the ‘group ratio method’. Use the method that gives you the largest allowance.

You must keep records of your calculation.

If your company’s or group’s net interest and financing costs are restricted, you should normally appoint a reporting company within 12 months of the end of the period of account unless you have previously appointed one. The reporting company must then submit a full Corporate Interest Restriction return.

Fixed ratio method

Using the fixed ratio method, the interest allowance is the lower of:

• 30% of the company’s or group’s UK taxable profits before interest, taxes, capital allowances and some other tax reliefs
• the company’s or group’s worldwide net interest expense

Group ratio method

To use this method, you must:

• appoint a reporting company
• elect to use the method in a Corporate Interest Restriction return

Using the group ratio method, the interest allowance is the lower of:

• the ratio of the company’s or group’s worldwide net interest expense owed to unrelated parties, to the company’s or group’s overall profit before tax, interest, depreciation and amortisation multiplied by the company’s or group’s taxable UK profits before interest and capital allowances
• the company’s or group’s worldwide net interest expense owed to unrelated parties

If your interest deductions are not restricted

You can appoint a reporting company, which must then submit an abbreviated return. If you replace the abbreviated return with a full return for that period of account, you can carry forward unused interest allowance for up to 5 years to reduce a future interest restriction.

Appoint a reporting company

Individual companies and groups can appoint a reporting company. Your reporting company will be responsible for submitting your company’s or group’s Corporate Interest Restriction return. The reporting company must be:

• liable to UK Corporation Tax
• non-dormant
• authorised by at least 50% of the group’s non-dormant companies (which are liable for UK Corporation Tax) to be appointed as the reporting company

When you have appointed a reporting company, you must submit a Corporate Interest Restriction return for every period of account, including when there’s no interest restriction. If you revoke the appointment of a reporting company and do not have an interest restriction, you will not have to submit a return.

If you do not appoint a reporting company, HMRC might appoint one for you.

Tell HMRC about the appointment of your reporting company

The method by which you tell HMRC of your appointed reporting company is changing. From late 2022, you will be required to submit your reporting company appointment electronically either using commercial software or by completing the online form. These changes will also apply if you need to revoke a reporting company appointment.

For further information, you may read the draft legislation (PDF, 158 KB, 3 pages) and the draft explanatory memorandum (PDF, 149 KB, 3 pages).

Using commercial software

To appoint a reporting company using commercial software, you will need a Government Gateway user ID and password. If you are an agent submitting the appointment on behalf of your client, you can use your own Gateway user ID and password.

If you do not have a user ID, you can create one when you use the service. HMRC will only accept submissions from organisations that have a Corporation Tax account with us.

Using the online form

To appoint a reporting company:

1. Fill in the template.
2. Complete the online form and upload the template.

Template for the appointment of a reporting company

ODS, 4.58 KB

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To use the online service, you need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you use the service.

You only need to appoint a reporting company once.

Revoke the appointment of a reporting company

To change your reporting company, you’ll need to tell HMRC you want to revoke your current reporting company and appoint a new one. This needs to be authorised by at least 50% of the group’s non-dormant companies (that are liable for UK Corporation Tax).

Submit a return

Your reporting company must submit a return within 12 months of the end of the reporting period the return is for.

Find out how to submit a full or abbreviated Corporate Interest Restriction return.

From late 2022, you will be required to submit your Corporate Interest Restriction return electronically either using commercial software or by completing the online form. These changes apply to both original and revised returns.

For further information, you may read the draft legislation (PDF, 158 KB, 3 pages) and the draft explanatory memorandum (PDF, 149 KB, 3 pages).

Additional information will be required on a Corporate Interest Restriction return from late 2022. Check your return includes the additional information required by reviewing the draft HMRC notice (PDF, 102 KB, 1 page).

Make an election

Elections let you choose a particular way of having your company’s or group’s tax treated, like choosing to use the group ratio method to work out your interest allowance. You should make elections in a Corporate Interest Restriction return.

If you need to make an election, but cannot do it in a return, send the details of the election to your Customer Compliance Manager.

Or, post the details of the election to:

You should mention Corporate Interest Restriction in your election to help HMRC direct your letter to the correct team.

Changes due to coronavirus (COVID-19)

Due to measures put in place to stop the spread of coronavirus, HMRC will accept elections by email when they cannot be posted or included with a Corporate Interest Restriction return.

You should email elections to your Customer Compliance Manager or you can email them to msbcorporateinterest.restrictionmailbox@hmrc.gov.uk if you do not have a Customer Compliance Manager.

This process will be updated when the COVID-19 measures end.

If you missed the deadline for appointing a reporting company and you now wish to do so, for example to carry forward unused interest allowance following an unforeseen change of circumstances, HMRC may appoint a reporting company for you.

You should explain why you did not appoint a reporting company within the time limit and give the reasons why you are asking HMRC to appoint the a reporting company. This could be because of COVID-19 or for some other reason.

HMRC will not routinely appoint just because the time limit was missed, but will consider doing so where there is an unforeseeable change in circumstances or other reason outside your control.

If you want to request that HMRC appoint a reporting company you should email your Customer Compliance Manager. If you do not have a Customer Compliance Manager you can send your email to msbcorporateinterest.restrictionmailbox@hmrc.gov.uk.

Penalties

If your company or group does not submit a Corporate Interest Restriction return when it should, it might have to pay a fixed penalty of:

• £500 if the return is up to 3 months late
• £1,000 if the return is more than 3 months late

If you submit an inaccurate Corporate Interest Restriction return, your company or group might have to pay a penalty of up to 100% of the extra tax (or lower tax relief) owed in the corrected return.

The amount of penalty you’ll have to pay will depend on the type of error and when you told HMRC about it. The penalty might be less if you tell HMRC about your error before they discover it.

Get more information

For help or more information, you can:

• find more information about Corporate Interest Restriction in HMRC’s Corporate Finance Manual
• contact your Customer Compliance Manager
• email msbcorporateinterest.restrictionmailbox@hmrc.gov.uk — do not email returns