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UK Corporation Tax is a big part of setting out how much tax companies and businesses throughout the United Kingdom have to pay. It is a tax on the profits of organizations and companies. It applies to limited companies, foreign companies with branches or offices in the UK, and some unincorporated associations.
The Corporate Interest Restriction (CIR) is an additional factor for businesses with significant net interest and financing costs. The CIR puts a cap on tax relief obtained by deducting net interest and other financing costs. It applies to companies or groups of companies that pay more than £2 million in net interest and financing costs in a year.
The Economic Crime Levy (ECL) is a tax on businesses that make more than £10,2 million a year in the UK regulated by the Money Laundering Regulations (MLR). The ECL is a yearly fee meant to stop economic crimes like money laundering and funding for terrorist activities. Depending on the organization’s work and how it is regulated, it is taken by either the Financial Conduct Authority (FCA), the Gambling Commission (GC), or HM Revenue and Customs (HMRC).
To follow the CIR, companies or groups with net interest and financing costs of more than £2 million must choose a reporting company within 12 months of the end of the accounting period. The reporting company must send the Corporate Interest Restriction return. If a group doesn’t choose a reporting company, it might lose some benefits only given to groups with a reporting company.
Regarding the ECL, impacted companies supervised by MLR must register for the levy and send an annual return. The report should include relevant financial information, and the levy payment based on the organization’s UK income must be made by the deadline.
Businesses and groups working in the UK need to know about the CIR and the ECL and how they work, including what they mean, how to register, and how to pay. By following these tax and legal guidelines, you can ensure compliance, avoid fines, and help make the business environment fair and safe. Let us discuss CIR and ECL in detail below.
Corporate Interest Restriction (CIR)
The Corporate Interest Restriction (CIR), which limits tax refunds for corporations and organizations, helps to prevent excessive interest deductions from reducing taxable profits and tax evasion.
Companies that satisfy the CIR criterion must designate a reporting company that files Corporate Interest Restriction reports to authorities. This return includes net interest and financing expenses, interest allowance calculations, and adjustments.
Here are a few examples to illustrate how the Corporate Interest Restriction works:
Example 1: Company A Company A is a large multinational corporation with significant borrowing costs. In 12 months, their net interest and financing costs amount to £3 million. As this exceeds the £2 million threshold, Company A falls under the scope of the Corporate Interest Restriction. They must appoint a reporting company within 12 months of the end of their accounting period to submit the Corporate Interest Restriction return, which will outline their interest allowance calculations and any resulting restrictions on tax relief.
Example 2: Group B Group B consists of several subsidiary companies operating in different sectors. When combined, the group’s net interest and financing costs £5 million in a 12-month. As this exceeds the £2 million threshold, Group B is subject to the Corporate Interest Restriction. They need to appoint a reporting company within 12 months of the end of their accounting period to prepare and submit the Corporate Interest Restriction return on behalf of the group. The return will provide a comprehensive overview of the group’s interest allowance calculations and the impact on tax relief.
Example 3: Company C (Net Interest and Financing Costs Below £2 million) Company C is a medium-sized business with relatively low borrowing costs. In 12 months, their net interest and financing costs amount to £1.5 million, below the £2 million threshold. As a result, Company C is not required to submit a Corporate Interest Restriction return. However, they still need to retain documents demonstrating compliance with the threshold, ensuring they do not deduct more than £2 million in net interest and financing costs during that period of account.
Net Interest and Financing Costs Thresholds
The Net Interest and Financing Costs Threshold is threshold set at £2 million for net interest and financing costs. Here’s additional information and examples to illustrate its significance:
If a company’s net interest and financing costs are below £2 million in 12 months, they are not required to submit a Corporate Interest Restriction (CIR) return. However, these companies must retain proper documentation to demonstrate compliance with the threshold. This documentation indicates that the company will not deduct more than £2 million in net interest and financing costs during the relevant period.
While a CIR return is not mandatory for companies below the threshold, they still have the option to appoint a reporting company to submit an abbreviated return. The abbreviated return is a condensed version of the CIR return. By appointing a reporting company and submitting the abbreviated return, these companies can carry forward any unused interest allowance for up to 5 years. Carrying forward the unused interest allowance enables them to reduce future interest restrictions when their net interest and financing costs increase.
Example 1: Company X (Net Interest and Financing Costs below £2 million) Company X has net interest and financing costs of £1.5 million in 12 months. Since this amount is below the £2 million threshold, Company X is not required to submit a CIR return. However, they must retain documents demonstrating their compliance with the threshold. If they choose to appoint a reporting company, they can still submit an abbreviated return to carry forward any unused interest allowance for future use.
Example 2: Company Y (Net Interest and Financing Costs above £2 million) Company Y incurs net interest and financing costs of £3.5 million in 12 months. As their costs exceed the £2 million threshold, Company Y falls under the scope of the CIR. They must appoint a reporting company within 12 months of the end of the accounting period and submit a full CIR return. However, if their costs decrease to £1.8 million in a subsequent period, they would not be required to submit a CIR return for that specific period, but the documentation should still be retained. They can carry forward the unused interest allowance from the previous period by submitting an abbreviated return through the reporting company.
Calculating the Interest Allowance
Calculating the interest allowance is important for companies with net interest and financing costs exceeding £2 million. Here’s a brief explanation of the process and the two methods available:
- Fixed Ratio Method: Under the fixed ratio method, companies calculate their interest allowance based on the company’s or group’s UK taxable profits and the worldwide net interest expense. The first step is determining 30% of the company’s or group’s UK taxable profits before interest, taxes, capital allowances, and certain tax reliefs. Alternatively, companies can calculate the interest allowance based on the worldwide net interest expense incurred.
The interest limit is set by taking the lower of the calculated two amounts. This method allows companies to decide how best to use their interest amount based on their needs.
- Group Ratio Method: Another way to work out the interest limit is using the group ratio method. It looks at the ratio of the company’s or group’s worldwide net interest cost owed to unrelated parties to the overall profit before tax, interest, depreciation, and amortisation, multiplied by the taxable UK profit before interest and capital allowances.
Using the group ratio method, companies can change how they calculate interest allowances to fit how their group’s finances work. It makes it easier to find out how much interest costs and how they affect taxable income.
When setting out the interest allowance, companies should choose the set ratio method or the group ratio method based on which one gives them a bigger allowance. The result is that they get as much tax relief as possible on their net interest and financing costs while still following the rules for Corporate Interest Restriction.
Appointment of Reporting Company
Companies or groups following the Corporate Interest Restriction (CIR) rules must select a reporting company. It is a very important step. The reporting company must meet certain requirements, such as paying UK Corporation Tax, not being inactive, and getting permission from at least 50% of the UK Corporation Tax-paying non-dormant companies. Once selected, it is up to the reporting company to send the Corporate Interest Restriction (CIR) return on behalf of the company or group. This return gives information about the net interest and funding costs, how the interest limit is calculated, and if there are any restrictions on tax relief because of this. By selecting a reporting company, a company or group can give the job of writing and filing the CIR return to that company or group. It ensures the rules for reporting under the Corporate Interest Restriction are followed.
Economic Crime Levy (ECL)
UK firms monitored by the Money Laundering Regulations (MLR) having yearly sales over £10.2 million must pay the Economic Crime Levy (ECL). The Financial Conduct Authority (FCA), Gambling Commission (GC), or HMRC collects the ECL.
When their UK income exceeds the threshold, affected companies must sign up for the ECL and send an annual return along with the payment. This registration only needs to be done once, and all future reports and fees need to be sent in by September 30th each year. The HMRC web service makes signing up, sending in, and paying for tax returns easier.
Even though the Economic Crime Levy doesn’t say anything about a reporting company, only groups with a reporting company can get some of its benefits. Taxpayers must name a reporting company by the due date to be able to get these benefits and avoid any possible drawbacks. But HMRC has the right to select a reporting company on behalf of an entity if there is a risk of tax evasion. It protects the tax system’s integrity and ensures that the ECL standards are met.