CIR tax rules on interest must have higher ceilings
The government should use the Budget to announce an increase in the amount of loan interest which companies can claim Corporate Tax relief for, under the Corporate Interest Restriction (CIR) tax rules, says Neil Insull, corporate tax partner at the leading tax and advisory firm.
Neil said: “With the Bank of England base rate now having risen to 5.25%, UK corporate borrowers will be feeling the pain of significantly higher finance costs. To rub salt into the wound, many of these borrowers will, for the first time, face an even higher post-tax burden of borrowing by being denied tax relief on a substantial part of their interest costs.”
He added: “Introduced in April 2017, the CIR tax rules are the means by which UK groups are, in broad terms, restricted on claiming tax relief on their interest deductions. This relief is limited to 30% of the company’s earnings, subject to an automatic deduction of up to £2m for smaller entities. The CIR is used to deny what might be described as ‘excessive’ relief in the UK for the cost of corporate debt. However, the CIR rules use an arbitrary measure of what is a ‘reasonable’ level of lending and have set a fixed £2m interest limit without reference to current interest rates nor the level of the base rate or overall size / profitability of the business concerned.”
Neil said: “When the £2m limit was introduced in 2017, the base rate was just 0.25% and a UK bank was lending (on a secured loan) at a rate which could be below 3%. A UK group could, therefore, borrow £66m without risk of interest being disallowed under CIR. Today, with commercial interest rates rising to over 9% the CIR rules are now biting when debt for a UK group reaches £22m. So not only do we have the prospect of UK companies bearing higher long-term finance costs, but those costs are in effect 25% higher than they could be, given that the ‘excess costs’ are not tax deductible at the current corporation tax rate of 25%.”
He added: “So unless the government decides to increase the CIR interest limit in the coming Budget, companies need to understand the impact of CIR and the means to mitigate its painful impact through the appropriate elections and managing the allocation of the disallowance across the group.”
