On 1 December 2017, HMRC published a new consultation, “Corporate Interest Restriction: Tax response to accounting changes for leasing”, on ways to ensure the corporate interest restriction rules work as intended following the introduction of IFRS16 Leases.
IFRS16 comes into force from 1 January 2019, though early adoption is possible, and abandons the concepts of finance and operating leases upon which the UK rules for leases are based. The accounting change is only relevant for entities who prepare their accounts in accordance with IFRS, but new legislation may impact all companies.
The Corporate Interest Restriction (CIR) rules are intended to address three ways in which an international group can generate excessive tax relief for interest and other finance costs.
- Placing higher levels of third party debt in high tax countries
- Intragroup loans generating interest deductions in excess of actual third party interest costs
- Using financing to generate tax exempt income.
The consultation sets out three options for amending the CIR rules so that they continue to apply where the lease is effectively a means of finance, with the intent that the new legislation will come into force on 1 January 2019.
Proposals:
- Follow the accounting treatment
- Keep the distinction between operating leases and finance leases for CIR purposes
- Introduce a distinction between “funding leases” and “non-funding leases”, to be defined in legislation, for CIR purposes
Option 1 is the least administratively burdensome, but may increase interest restrictions for some groups. Options 2 and 3 are “expected to have similar outcomes to the current rules”.
However, Option 1 would result in operating leases being treated differently by the lessee depending on whether they follow UK GAAP or IFRS.
Option 3 would rely on a new definition of a “funding lease”. Three tests are suggested, with any one being sufficient:
- Finance lease test, which would be modified to not rely on the accounting treatment,
- Lease payment test
- Useful economic life test.
Replies should be sent to
Summary of Questions:
- What are the advantages and disadvantages of option 1?
- Please provide specific examples of intra-group mismatches between the lessee and lessor that would arise under option 1 that would make a significant difference to the overall CIR position of the group.
- Would option 1 result in some lessees deciding not to adopt an accounting framework incorporating IFRS 16 for its individual entity accounts?
- What are the advantages and disadvantages of option 2?
- Are there circumstances in which mismatches can arise under option 2, and would this be problematic?
- What are the advantages and disadvantages of option 3?
- Comparing options 1, 2 and 3, what is your preferred option and why?
- Would this proposal cause any significant difficulties?
- Please provide details of any other options you would prefer, bearing in mind legislative complexity and administrative burdens.
Links:
HMRC: Corporate Interest Restriction: Tax response to accounting changes for leasing
Corporate Interest Restriction
Finance Act 2017: tax update and rolling planner
Related consultations: Consultation: Lease accounting changes and Leasing: Tax response to accounting changes
