Restriction on corporate tax relief for interest deductions

When determining how much UK corporation tax your company or group has to pay, there is a limit (known as the corporate interest restriction). This limits the amount of tax relief you can get for the deduction of net interest and other financing charges.

This corporate interest restriction only applies to individual companies or groups of companies whose net interest and funding costs exceed £2 million over a 12 month period.

If the net interest and financing costs of your company or group are limited, you must appoint a reporting company within 12 months of the end of the accounting period. The reporting company must then submit a statement of restriction of corporate interest.

If your net interest and financing charges are less than £2 million

Your business or group does not need to submit a Statement of Restriction of Business Interest. However, you must keep documentation which shows that your company or group will not deduct more than £2 million in net interest and finance charges during that accounting period.

You can always designate a declaring company, this company will then have to file an abbreviated declaration. To reduce a future interest restriction, you can carry forward the unused interest deduction for up to 5 years by replacing the abbreviated statement with a full statement for that account period.

If your net interest and finance charges are over £2 million

You must determine the “interest subsidy” of your company or your group. This is the maximum amount of net interest and finance charges that your business or group can deduct in an accounting period.

You can use the “fixed ratio method” or the “group ratio method”. Use the method that gives you the largest allocation.

You must keep a record of your calculation.

If the net interest and financing costs of your company or group are limited, you should normally appoint a reporting company within 12 months of the end of the accounting period, unless you have appointed one earlier. The reporting company must then submit a full statement of restriction of company interest.

Fixed ratio method

Under the fixed ratio method, the interest deduction is the lesser of:

  • 30% of UK company or group taxable profits before interest, taxes, depreciation allowances and other tax relief
  • the worldwide net interest expense of the company or group

Group ratio method

To use this method, you must:

  • name a reporting company
  • elect to use the method in a corporate interest restriction statement

Under the group ratio method, the interest deduction is the lesser of:

  • the ratio of the company’s or group’s worldwide net interest expense to unrelated parties to the company’s or group’s overall profit before tax, interest, depreciation and amortization multiplied by the company’s chargeable UK profits or group before interest and capital cost allowances
  • the company’s or group’s worldwide net interest expense due to unrelated parties

If your interest deductions are not limited

You can name a reporting company, which must then submit an abbreviated report. If you replace the abbreviated statement with a full statement for this account period, you can carry forward the unused interest deduction for up to 5 years to reduce a future interest restriction.

Name a reporting company

Sole proprietorships and groups can designate a reporting company. Your reporting company will be responsible for submitting your company or group’s statement of restriction of interest. The reporting company must be:

  • liable to UK corporation tax
  • not dormant
  • authorized by at least 50% of the non-dormant companies in the group (subject to UK corporation tax) to be named as the reporting company

When you have appointed a reporting company, you must submit a company interest restriction declaration for each account period, including when there is no interest restriction. If you revoke the appointment of a reporting company and do not have a restriction of interest, you will not have to submit a report.

If you do not appoint a reporting company, HMRC can appoint one for you.

If you missed the filing company nomination deadline

If you have missed the deadline and now want to move forward, for example to carry over unused interest deduction following an unforeseen change in circumstances, then HMRC can appoint a reporting company for you.

You will need to do the following:

  • tell us why you did not designate a reporting company within the time limit
  • give reasons why you are asking HMRC to name the reporting company – for example it could be due to coronavirus (COVID-19)

We will not systematically appoint simply because the deadline has passed

We will consider doing so in the event of an unforeseeable change in circumstances or for any other reason beyond your control.

If you would like to ask HMRC to name a reporting company, you can email:

Inform HMRC of the appointment of your reporting company

Inform HMRC of the appointment of your reporting company

You must submit your reporting company nomination electronically either by:

  • using commercial software
  • complete the online form

You should also use the methods above if you need to revoke a reporting company appointment.

Use commercial software

To designate a reporting company using commercial software, you will need a Government Gateway username and password. If you are an agent submitting the appointment on behalf of your customer, you can use your own Gateway username and password.

If you don’t have a user ID, you can create one when using the service. HMRC will only accept submissions from organizations that have a corporation tax account with us.

See “Providers of commercial software for corporation tax” for a list of commercial software providers for declarations of interest restrictions.

Using the online form

To designate a reporting company:

  1. Complete the template.
  2. Complete the online form and download the template.

Reporting Company Designation Model

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To use the online service, you need a Government Gateway username and password. If you don’t have a user ID, you can create one when using the service.

You only need to designate a reporting company once.

Revoke the designation of a reporting company

To change your reporting company you will need to tell HMRC that you wish to revoke your current reporting company and appoint a new one. This must be authorized by at least 50% of the non-dormant companies in the group (subject to UK corporation tax).

Submit a return

Your reporting company must submit a report within 12 months of the end of the reporting period for which the report is intended.

Learn how to submit a full or abbreviated corporate interest restriction statement.

You must submit your corporate interest restriction statement electronically either:

  • using commercial software
  • complete the online form

This applies to both original and revised statements.

See “Providers of commercial software for corporation tax” for a list of commercial software providers for declarations of interest restrictions.

From October 1, 2022, you will need to provide us with more information on a corporate interest restriction statement.

You will need to tell us:

  • the country of incorporation of the largest parent company (ultimate parent) – if it does not have a unique tax reference number (UTR) for corporation tax
  • the identifier of the legal entity of the most significant parent company (ultimate parent)
  • whether there are companies within the group that have made a qualifying infrastructure company choice – which takes effect in the account period
  • the unique self-assessment tax reference numbers of all UK partnerships where the group has made an interest deduction election (consolidated partnerships)
  • the adjusted group net interest expense for the period, even if the group ratio is used

make an election

Elections allow you to choose a particular way to treat your business or group tax, such as choosing to use the group ratio method to calculate your interest deduction. You must make choices in a corporate interest restriction statement.

If you need to make an election, but cannot make it in a statement, send the details of the election to your Customer Compliance Manager.

Or, view election details at:

Corporate tax services

HM Revenue and Customs

BX9 1AX

You should mention the business interest restriction in your election to help HMRC direct your letter to the right team.

Penalties

If your company or group does not submit a declaration of restriction of business interest when it should, it may be subject to a fixed penalty of:

  • £500 if the return is up to 3 months late
  • £1,000 if the return is more than 3 months late

If you submit an inaccurate corporate interest restriction statement, your company or group may have to pay a penalty of up to 100% of the additional tax (or lower tax relief) due in the corrected statement .

The amount of penalty you will have to pay will depend on the type of error and when you informed HMRC. The penalty could be less if you tell HMRC about your mistake before they discover it.

Get more information

For help or more information, you can:

Luisa D. Fuller