CFM97610 – Corporate Finance Manual – HMRC Internal Manual

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The rules of limitation of the interest of the companies (CIR) apply to any company subjected to the tax on the companies. “Company” is defined by CTA10/S1121 to include any body corporate or unincorporated association, other than a partnership, joint ownership scheme (as defined by FSMA2000/S235A), local authority or association of local authority. It follows that the rules will encompass bodies corporate created by Royal Charter, Act of Parliament or measure of the Church of England, registered companies, companies limited by guarantee and unincorporated associations . While these organizations are generally subject to corporation tax on their profits, the situation can be complicated when the income is in fact not subject to tax. This can happen, for example:

  • because some of their activities are not considered to be subject to corporation tax (see BIM24000 et seq. for examples of mutual societies and other organizations such as professional organisations); Where
  • because there are exemptions or exemptions due, in particular where the organization concerned is established for charitable purposes only and meets the definition of charity for tax purposes (FA10/SCH6/PARA1(1)).

In the context of charities, CTA10/PT11/CH3 makes a number of exemptions available to charitable enterprises, defined in FA10/SCH6/PARA1(2) as a charity that is a group of people. For general guidance on tax issues specific to charities, see Charities: Detailed guidance on how the tax system works.

The CIR rules apply after most other allowances and deductions have been claimed, so if the interest is an expense of an activity which gives rise to profits which are not subject to corporation tax, for example, the exempt profits of organizations falling under BIM24000, or where the net result of the activity is subject to an exemption or a legal allowance, such as those of CTA10/PT11 which apply to companies Charities, Scientific Research Associations (CTA10/S469) and Eligible Organizations (CTA10/S468), interest will not be a tax – interest charges and cannot be limited by the CIR. Similarly, exempt profits will not be included in tax EBITDA. The application of the CIR in such cases should be reasonably straightforward, although exempt amounts may still be taken into account in the calculation of group interest and group EBITDA.

However, in some cases, interest expense is not taken into account in the calculation of net profit subject to tax, but rather is taken into account in the calculation of a deficit of non-commercial lending relationships, although that in practice it is unlikely that such deficits could be based on available taxable profits. In such cases, the CIR may be relevant; the guidance that follows covers possible approaches to compliance issues that HMRC considers acceptable.

In the following guidance pages:

  • CFM97620 explains the position where the exempt amounts are the profits of a transaction.

  • CFM97630 explains the position where the exempt amounts are property income.

  • CFM97640 explains how the rules of the CIR work within the framework of a group comprising a company benefiting from a charitable exemption.

  • CFM67650 provides an example.

Interest payable to a charity

There is a special rule (in TIOPA10/S459) which provides that interest payable to a charitable corporation by its wholly-owned subsidiary is not treated as tax interest expense of a corporation. For details, see CFM95695.

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