CFM95620 - Interest restriction: tax-interest: disregarded periods

TIOPA10/S382(6)-(9)

The object of the calculations is to arrive at an aggregate tax-interest figure for a particular period of account for a worldwide group. As a result, only amounts from a relevant accounting period that are attributable to the group’s period of account are included in the tax-interest of the company for the period of account.

A ‘relevant accounting period’ is defined in S490 as one that falls wholly or partly within a period of account of the worldwide group.

It is therefore necessary to adjust for any ‘disregarded periods’. These are periods which:

• Fall outside the group’s period of account; or
• Relate to a time during which the company was not a member of the group.

Where either of these circumstances apply, the amounts to be included in tax-interest are reduced on a ‘just and reasonable basis’ to exclude these periods. This can result in a reduction to nil.

This corresponds to the same issue of disregarded periods addressed in relation to the calculation of tax-EBITDA (CFM95730)

Example 1

A company has an accounting period for the year ended 31 December 2017. It is a member of a group that has a period of account for the year ended 31 March 2018. Only the amounts attributable to the last nine months of the accounting period for the company, so from 1 April to 31 December 2017, will be included in calculating the adjusted corporation tax earnings for the group’s period of account.

Example 2

A company prepares accounts for a twelve-month period ending 31 December 2018, and these accounts show a tax-interest expense amount of £240,000 which accrues evenly over the period. The company only became a member of the group on 1 June 2018. This means that the period from 1 January to 31 May is a disregarded period. The tax-interest expense amount is reduced by £100,000 (£240,000 x 5/12) as this refers to the disregarded period, leaving an expense amount of £140,000.

Meaning of just and reasonable basis

What ‘just and reasonable basis’ means in practice will depend on the particular facts and circumstances.

The legislation does not include a presumption that amounts of tax-interest for a company accounting period should be apportioned on a time basis between worldwide group periods of account and that some other approach should be adopted only if time apportionment would work unjustly or unreasonably.

The UTT supplementary ring-fence profits charge case of HMRC v Total E&P North Sea Ltd (UT/2018/0039) does not set applicable precedent. Thus, while a time apportionment approach would be acceptable so long it does not lead to a distorted result, the computation of the actual figure of tax-interest for each period would not be rejected on the grounds of going further than might be necessary. Equally, a reasonable approximation should be acceptable.

It should be noted that tax-interest is defined by references to amounts that are brought into account for corporation tax, or would be, but for the CIR. Therefore, it is expected that significant consideration be given to when an item would typically be brought into account for tax purposes.

In particular, consideration should be given to:

• The period in which amounts would be recognised in the company’s financial statements if they were drawn up for particular periods.
• The period in which amounts would be brought into account by the company if it had a different accounting period.
• Ensuring that the amounts are, in total, fully attributed. So, if the accounting period is broken up into a number of periods which do not overlap and which, taken together, completely align with the accounting period in question, the total of the amounts attributed to those periods must equal the amount being attributed.

Example 3

A company has a consistent level of borrowing costs throughout an accounting period. As a result, a simple time apportionment is appropriate for attributing the interest costs on the company’s borrowing to a part of an accounting period.

Example 4

A company makes a large acquisition part way through an accounting period, which is funded through the issue of a new bond which carries a fixed interest coupon. As a result, time apportioning the borrowings across the whole of the accounting period is not appropriate. Apportioning the interest over the period from when the loan was taken out is more appropriate.

Example 5

A company has accrued interest payable on a loan to a connected company that was not paid within 12 months and hence was deferred under the late paid interest rules CTA09/PT5/CH8) ). The deduction for the late paid interest should be attributable to the part of the period in which the interest was paid.

Mean accounting dates

Where UK companies draw up their accounts to varying dates each year, they may be treated as having a mean accounting date for corporation tax purposes (see CTM01560). Where this is the case, when considering the relevant accounting periods for CIR calculations, the company can also use the mean accounting date agreed for corporation tax purposes.

Example 6

A group with a non-UK ultimate parent has a CIR period of account to 31 December each year. The UK members of the group prepare their financial statements to the last Saturday in December each year, so their corporation tax accounting periods ends on a different date each year. The UK companies have an agreement with HMRC that they have a mean accounting date of 31 December for corporation tax purposes. When calculating the tax-interest amounts for CIR, the companies may use the figures from their corporation tax computations without adjusting for any days which would technically be outside of the CIR period of account.

Non-sterling amounts

Where a corporation tax computation includes non-sterling amounts (for example, where the company has a non-sterling functional currency), these should be translated into sterling to calculate the tax-interest amounts.

As tax-interest amounts are computed according to corporation tax rules, the translation should use the same exchange rate that is used in the corporation tax computation. This should be the rate used in accordance with CTA10/PT2/CH4.

Where there is a disregarded period and amounts need to be apportioned, the same exchange rate should be used as in the corporation tax computation, then the resulting sterling amount apportioned on a just and reasonable basis, unless this produces a distortive result.

Administration

Where there is an enquiry into the CIR figures which involves a dispute over the just and reasonable basis, HMRC may make a determination of the just and reasonable basis to be used as part of process of closing the enquiry. The reporting company may appeal against the determination on the basis that the attribution is not just and reasonable.