CFM95723 - CFM95723: Interest restriction: tax-EBITDA: possible impact of CIR on calculation of group or consortium relief

TIOPA10/S406, S407(1)(g)

Normally group relief or consortium relief or group relief for carried forward losses will be an excluded amount, and therefore not taken into account in computing the tax-EBITDA of a company.

There is an exception to this if the company surrendering the group relief or consortium relief is not in the same CIR worldwide group as the claimant company. In such a case, the surrender will have the effect of reducing the tax-EBITDA of the claimant company.

Where this results in an interest restriction for the company, there can be a knock-on effect in that this in turn may enable the company to make a further claim for group or consortium relief. As a result, this can set off an iterative process.

Should this situation arise, it is not necessary for the companies concerned to make a series of claims and surrenders - a single claim and a single surrender may be made, so long as the end result is a valid claim, after taking account of the final consequential amendments to a company’s CIR disallowance.

Example

A Ltd is a UK-resident company owned by a consortium of four companies, each holding 25% of A Ltd’s shares. None of the shareholders exercise sufficient control for the company to be consolidated in its financial statements. A Ltd has no subsidiaries of its own and is therefore a single company worldwide group.

Before any consortium relief surrender and claim, A Ltd has taxable profits of £70m: tax-EBITDA of £100m and net tax-interest expense of £30m. As the net tax-interest expense is not greater that the fixed ratio percentage of its tax-EBITDA, there is no CIR disallowance.

A Ltd than claims consortium relief of £70m. Its tax-EBITDA is reduced by £70m because the amount surrendered is not a loss of the worldwide group. So, its tax-EBITDA is now only £30m, 30% of that is £9m and there is a CIR disallowance of £21m. This means that £21m is now taxable being £100m of tax-EBITDA before consortium relief, less £70m of consortium relief and £9m of tax-interest expense (30, less disallowance of £21m).

At this point, a further surrender of consortium relief of £21m could be made. But as this reduces tax-EBITDA from £30m to £9m which restricts the tax deduction for net tax-interest expense to 30% of £9m, which is £2.7m, resulting in a further disallowance of £6.3m (£9m less £2.7m). This in turn allows a further claim of consortium relief of £6.3m.

It is obvious that in this simple example, the maximum consortium relief that can be claimed is £100m, at which point there is no deduction at all for net tax-interest expense. It is acceptable for the company to claim £100m of consortium relief, without having to make an iterative series of claims.

This scenario is likely to be rare in practice because, as the example shows, the effect of the interaction is that the reduction of the amount on which the claimant is taxable is less than the loss surrendered.

Group relief for carried forward losses

The position is similar in the case of group relief for carried forward losses, where the loss is not a loss of the claimant’s CIR group. The loss will only be a loss of the claimant’s group where surrendering and claimant companies are members of the same CIR group, both for the period in which the loss arises, and the period to which the claim relates.

Where the loss is a loss of the claimant’s CIR group, it is not a deduction in computing tax-EBITDA (applying TIOPA10/S407(1)(g)) and does not set off the iterative process.