Originating from Action 4 of the OECD’s BEPS project, which is concerned with multinational groups eroding their tax base with interest expense deductions, the UK Corporate Interest Restriction “CIR” rules have been introduced and will apply from 1 April 2017 (regardless of when a company’s year-end is). These rules are expected to impact leveraged acquisitions and will have ramifications for both old and new financing structures. Going forward, the CIR rules are expected to constitute an important consideration for tax due diligence procedures and structuring work undertaken in relation to both UK groups and multinational groups with UK companies which have significant net interest expenses.

The rules are complex but broadly look to restrict UK interest deductions for a group’s net interest expense (above a £2m de minimis) to the lower of:

i. 30% of the UK tax EBITDA; and

ii. A measure of the worldwide group’s net external finance expense.

A “group ratio” election can also be made which may give a better result to the extent the worldwide group is more leveraged than the UK sub-group. However, related party transactions are disregarded for the purposes of determining how leveraged the worldwide group is and hence, for example, private equity groups relying on debt push down from the fund are unlikely to get a better outcome under the group ratio method.
 

A couple of additional points are also worth noting:

• As the CIR rules apply at the level of the worldwide group (broadly any entities that would form part of a group under IAS), depending on how private equity groups have structured their investments, the rules may apply to all their UK investments taken together as a whole rather than separately.
• Financial services group are generally expected to be in a net interest income position due to the nature of their business such that the rules may not limit their interest deductibility.

For more information please contact;

Andrew Robinson, KPMG in the UK 

Richard Taylor, KPMG in the UK