What is the Corporate Interest Restriction (CIR)?

The CIR limits the tax deduction for net interest expense to 30% of taxable EBITDA (earnings before interest, taxes, depreciation, and amortisation). It applies to groups and companies with net interest expense above £2 million per year. The Corporate Interest Restriction (CIR), introduced in Finance Act 2017 (following the OECD's BEPS Action 4), limits the tax deduction for net interest expense for UK groups and companies. Key features: (1) 30% fixed-ratio — the net interest deduction is limited to 30% of taxable EBITDA. Taxable EBITDA is calculated from the group's taxable profits, adding back interest income, interest expense, depreciation, and amortisation. (2) De minimis — the CIR only applies to groups and companies with net interest expense above £2 million per year. If net interest is below £2 million, no restriction applies. (3) Carry-forward — interest that is restricted (not deductible in the current year) can be carried forward indefinitely. Similarly, unused capacity can be carried forward for up to 5 years. (4) Group ratio rule — an alternative to the 30% fixed-ratio, based on the worldwide group's actual interest-to-EBITDA ratio. (5) Appoint a reporting company — the group must appoint a nominated company to file the Interest Restriction Return (IRR). The CIR is designed to prevent excessive debt financing and base erosion, aligning the UK with international anti-BEPS standards. Relevant legislation: TIOPA 2010, Part 7A (Corporate Interest Restriction); Finance Act 2017 (introduction); OECD BEPS Action 4. Example: A UK group has taxable EBITDA of £10 million and net interest expense of £4 million. The CIR limit is 30% of £10 million = £3 million. The restricted interest is £1 million (£4 million - £3 million), which is carried forward. The group can deduct £3 million in the current year and carry forward £1 million to future years. Common mistake: Assuming that the CIR only applies to highly leveraged groups. The CIR applies to any group with net interest above £2 million and taxable EBITDA below the interest amount — even moderately leveraged groups can be affected.

How is taxable EBITDA calculated for the CIR?

Taxable EBITDA is calculated from the group's taxable profits, adding back interest income, interest expense, depreciation, and amortisation. The result is the EBITDA that is used to determine the 30% interest deduction limit. Taxable EBITDA for the CIR is calculated as follows: (1) Start with taxable profits — the group's total taxable profits before interest (from the corporation tax returns of all UK group companies). (2) Add back interest income — add back interest income that was included in taxable profits. (3) Add back interest expense — add back interest expense that was deducted from taxable profits. (4) Add back depreciation — add back depreciation (capital allowances are not added back, as they are the tax equivalent of depreciation). (5) Add back amortisation — add back amortisation of intangible assets. The result is taxable EBITDA — the group's earnings before interest, taxes, depreciation, and amortisation, based on taxable profits (not accounting profits). Key points: (a) Taxable, not accounting — taxable EBITDA is based on taxable profits, not accounting profits. This means it reflects the tax treatment of items (e.g., capital allowances instead of depreciation). (b) Group level — taxable EBITDA is calculated at the group level (all UK group companies). (c) Exclusions — certain items are excluded from taxable EBITDA, including property income and losses relieved against profits. (d) 30% limit — the net interest deduction is limited to 30% of taxable EBITDA. The calculation can be complex, and specialist advice is recommended. Relevant legislation: TIOPA 2010, Part 7A, Chapter 3 (taxable EBITDA); Finance Act 2017. Example: A UK group has taxable profits of £5 million. This includes interest income of £1 million, interest expense of £4 million, depreciation of £2 million, and amortisation of £1 million. Taxable EBITDA = £5 million + £1 million (interest income) + £4 million (interest expense) + £2 million (depreciation) + £1 million (amortisation) = £13 million. The CIR limit is 30% of £13 million = £3.9 million. Common mistake: Using accounting EBITDA instead of taxable EBITDA. The CIR is based on taxable profits, not accounting profits, and the two can differ significantly (e.g., due to capital allowances vs depreciation).

What is the group ratio rule?

The group ratio rule is an alternative to the 30% fixed-ratio. It allows the net interest deduction to be limited to the worldwide group's actual interest-to-EBITDA ratio (based on consolidated accounts), which may be higher than 30% for highly leveraged groups. The group ratio rule is an alternative to the 30% fixed-ratio rule. Under the group ratio rule, the net interest deduction is limited to the worldwide group's actual interest-to-EBITDA ratio, rather than the fixed 30%. Key features: (1) Worldwide group — the group ratio is based on the worldwide group's consolidated financial statements (the 'ultimate parent' accounts). (2) Calculation — the group ratio is calculated as the worldwide group's net interest expense (from the consolidated accounts) divided by the group's EBITDA (from the consolidated accounts). (3) Application — if the group ratio is higher than 30%, the group can elect to use the group ratio, allowing a higher UK net interest deduction. (4) Election — the group ratio rule is optional and must be elected by the nominated company in the Interest Restriction Return (IRR). (5) Group ratio interest — the maximum UK net interest deduction under the group ratio is the group ratio × UK taxable EBITDA. The group ratio rule benefits highly leveraged groups (e.g., groups in infrastructure, real estate, or private equity ownership) where the worldwide interest-to-EBITDA ratio is above 30%. For groups with a ratio below 30%, the fixed-ratio rule is more advantageous. Relevant legislation: TIOPA 2010, Part 7A, Chapter 5 (group ratio rule); Finance Act 2017. Example: A worldwide group has net interest expense of £500 million and EBITDA of £1 billion, giving a group ratio of 50%. The UK subgroup has taxable EBITDA of £10 million and net interest of £5 million. Under the 30% fixed-ratio, the deduction would be limited to £3 million. Under the group ratio rule (50%), the deduction would be limited to £5 million, allowing the full £5 million to be deducted. Common mistake: Not considering the group ratio rule for highly leveraged groups. The group ratio rule can significantly increase the interest deduction for groups with a worldwide interest-to-EBITDA ratio above 30%.

What happens to interest that is restricted by the CIR?

Restricted interest (not deductible in the current year) can be carried forward indefinitely and deducted in future years if there is sufficient capacity. Unused capacity (where interest is below the limit) can be carried forward for up to 5 years. Interest that is restricted by the CIR (not deductible in the current year) is not lost — it can be carried forward: (1) Indefinite carry-forward of restricted interest — restricted interest (the amount by which net interest exceeds 30% of taxable EBITDA) is carried forward indefinitely. It can be deducted in future years if there is sufficient capacity (i.e., net interest is below 30% of taxable EBITDA in the future year). (2) Carry-forward of unused capacity — if net interest is below 30% of taxable EBITDA in a year, the unused capacity (the difference between the actual net interest and the 30% limit) can be carried forward for up to 5 years. This capacity can be used to deduct carried-forward restricted interest or current-year interest. (3) Ordering — when deducting interest, current-year interest is deducted first, followed by carried-forward restricted interest (using any unused capacity from the current year or carried-forward capacity). (4) Group allocation — the interest deduction and restriction are calculated at the group level, and the nominated company allocates the deduction and restriction among the UK group companies. (5) Loss of carried-forward interest — carried-forward restricted interest may be lost if the company ceases to exist or if there is a change in ownership (subject to the loss reliefs rules). The carry-forward provisions ensure that restricted interest is not permanently lost, but the timing of the deduction is deferred. Relevant legislation: TIOPA 2010, Part 7A, Chapters 6-7 (carry-forward of restricted interest and unused capacity); Finance Act 2017. Example: A group has £1 million of restricted interest in Year 1. In Year 2, the group has taxable EBITDA of £10 million and net interest of £2 million. The CIR limit is £3 million (30% of £10 million). The group has £1 million of unused capacity (£3 million - £2 million), which can be used to deduct the £1 million carried-forward restricted interest. The total deduction in Year 2 is £3 million (£2 million current year + £1 million carried forward). Common mistake: Assuming that restricted interest is lost. It is carried forward indefinitely and can be deducted in future years if there is sufficient capacity. Groups should track the carried-forward interest and capacity carefully.

Who needs to file an Interest Restriction Return (IRR)?

Groups subject to the CIR must appoint a nominated company to file an IRR within 12 months of the end of the accounting period. The IRR calculates the CIR and allocates the interest deduction among UK group companies. Non-compliance can result in penalties. Groups subject to the CIR must file an Interest Restriction Return (IRR): (1) Nominated company — the group must appoint a nominated company (the 'reporting company') to file the IRR on behalf of the worldwide group. The appointment must be made within 12 months of the end of the accounting period. If the group does not appoint a company, HMRC may appoint one. (2) Filing deadline — the IRR must be filed within 12 months of the end of the accounting period (the same deadline as the corporation tax return). (3) Content — the IRR includes: (a) the group's taxable EBITDA, (b) the net interest expense, (c) the CIR calculation (fixed-ratio or group ratio), (d) any restriction, (e) the allocation of the interest deduction among UK group companies. (4) Default position — if the IRR is not filed, HMRC may apply the default 30% fixed-ratio restriction without any group-specific adjustments. This can result in a higher restriction than necessary. (5) Penalties — failing to file the IRR on time can result in penalties. (6) Amendments — the IRR can be amended within 12 months of the filing deadline. The IRR is a group-level return, separate from the individual corporation tax returns of the UK group companies. The nominated company coordinates the filing and ensures compliance. Relevant legislation: TIOPA 2010, Part 7A, Chapter 9 (Interest Restriction Return); Finance Act 2017. Example: A UK group has an accounting period ending 31 December 2025. It appoints a nominated company and files the IRR by 31 December 2026 (within 12 months). The IRR reports taxable EBITDA of £10 million, net interest of £4 million, a CIR limit of £3 million, a restriction of £1 million, and allocates the £3 million deduction among the UK group companies. Common mistake: Not filing the IRR because the group's net interest is below the 30% limit. The IRR must be filed even if there is no restriction, as it confirms the calculation and allows for the carry-forward of unused capacity.

International Tax › Corporate

Corporate Interest Restriction (CIR)

The CIR limits the tax deduction for net interest expense to 30% of taxable EBITDA. Understand the fixed-ratio rule, group ratio rule, and how to manage CIR compliance.

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The Corporate Interest Restriction (CIR), introduced in 2017, limits the tax deduction for net interest expense for UK groups and companies. The restriction is based on the OECD's BEPS Action 4 and limits the net interest deduction to 30% of taxable EBITDA (earnings before interest, taxes, depreciation, and amortisation). The CIR applies to groups and companies with net interest expense above £2 million per year. Understanding the CIR and how to manage compliance is essential for groups with significant debt financing.

The 30% Fixed-Ratio Rule

The CIR limits the net interest deduction to 30% of taxable EBITDA. Taxable EBITDA is calculated from the group's taxable profits before interest, depreciation, and amortisation. If net interest exceeds 30% of taxable EBITDA, the excess is not deductible in the current year but can be carried forward indefinitely. The restriction applies to groups and companies with net interest expense above £2 million.

The Group Ratio Rule

An alternative to the 30% fixed-ratio rule is the group ratio rule. Under this rule, the net interest deduction is limited to the group's overall net interest-to-EBITDA ratio, based on the worldwide group's consolidated accounts. If the group's worldwide ratio is higher than 30%, the group ratio rule may allow a higher deduction. The group ratio rule is optional and must be elected by the group.

Carry-Forward of Unused Interest

Interest that is restricted (not deductible in the current year due to the CIR) can be carried forward indefinitely. The carried-forward interest can be deducted in future years if there is sufficient capacity (i.e., net interest is below 30% of taxable EBITDA). Similarly, unused capacity (where net interest is below 30% of EBITDA) can be carried forward for up to 5 years, allowing the group to use the capacity in future years.

Compliance and Reporting

Groups subject to the CIR must: (1) Appoint an interest restriction return (IRR) — a nominated company within the group files the IRR for the worldwide group. (2) Calculate taxable EBITDA — determine the group's taxable EBITDA for the accounting period. (3) Apply the CIR — calculate the net interest deduction, apply the 30% fixed-ratio or group ratio rule, and determine any restriction. (4) File the IRR — the IRR must be filed within 12 months of the end of the accounting period. Non-compliance can result in penalties and the default 30% restriction being applied.

Key Points

What You Need to Know

The CIR limits the net interest deduction to 30% of taxable EBITDA
The £2 million de minimis means most small groups are not affected
The group ratio rule may allow a higher deduction if the group's worldwide ratio is above 30%
Restricted interest can be carried forward indefinitely
Groups must file an Interest Restriction Return (IRR) within 12 months

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