IFRS 16 & Corporate Interest Restriction – Tax, Treasury and Finance departments are all affected

ifrs 16 and corporate interest restriction feature 2 | IFRS 16 & Corporate Interest Restriction - Tax, Treasury and Finance departments are all affected
By Ryan Hendrie | 20th August 2019 | 5 min read



STOP PRESS: If your organisation is likely to deduct more than £2 million in net interest and financing costs when calculating UK Corporation Tax then read on if you want to save time and effort in the treatment of operating type leases under CIR for tax calculation and then IFRS 16 for financial statement compilation.

In September 2018, HMRC updated its short guide “Restriction on corporation tax relief for interest deductions” with more guidance for those corporate bodies which deduct in excess of £2m a year in interest and other financing costs, on calculating their ‘interest allowance’ to determine whether the restriction applies (https://bit.ly/2CGl6fC). Additionally, a new section on penalties has been added. Further, Groups may be required to appoint a reporting company and submit either an abbreviated or full return (https://www.gov.uk/guidance/corporate-interest-restriction-on-deductions-for-groups).


The Corporate Interest Restriction (“CIR”) rules, which came into force on 1 April 2017, limit the net financing costs which a group can deduct against its UK taxable income. The rules apply to interest and other amounts economically equivalent to interest - referred to as “tax-interest” in the legislation and this tax interest includes the financing costs of finance leases.

Adhering to the CIR rules has to date depended in some part on the distinction between finance leases and operating leases but with the introduction of the IASB’s new lease standard, IFRS 16 which is now in force in respect of those accounting periods beginning on or after 1 January 2019, any distinction in respect of leases held by lessees has disappeared (though lessor accounting is largely unchanged).

As HM Revenue & Customs (“HMRC”) has confirmed the repealing of section 53 Finance Act 2011, which applied to negate any change in a leasing accounting standard for tax purposes. Consequently, the CIR rules will now accommodate the changes being introduced by IFRS 16.


In this respect, following a consultation in respect of three possible options for amending the CIR rules, HMRC opted to retain the distinction between operating and finance leases for CIR purposes (i.e. Option 2), but with some modifications. With this modified approach, those lessees applying IFRS 16 will for tax purposes continue to treat leases using the finance and operating lease classification, even though of course for accounting purposes there will no longer be such a distinction between leases. Lessees, for CIR purposes are required to use a classification test that is equivalent to the one used by lessors under IFRS 16, but they will not need to check with their lessor just how the lessor is classifying the lease.

In respect of ‘finance leases’, tax-interest would include amounts which a lessee recognises as a finance charge in relation to a leased asset but in respect of ‘operating leases’, lease payments would not need to be included in the lessee’s tax-interest calculation.

Undoubtedly lessees will be rightfully concerned that they will have to treat operating leases in two different fashions as they deal with the annual tax calculation and as they compile their annual financial statements. This need not be a burden if they are using a lease management solution such as LLA from Innervision which with foresight has cleverly built in a mechanism that flags affected leases and performs the necessary calculations under IFRS 16 and IAS 17.

Though the link to HMRC’s guidelines is above it is worth here just setting out the contents and the key requirements.


Contents –

  1. If you’ll deduct less than £2 million
  2. If you’ll deduct more than £2 million
  3. If your interest deductions are not restricted
  4. Appoint a reporting company
  5. Submit a return
  6. Elections
  7. Penalties
  8. Get help or more information


And in summarising how you may be affected and just what to do the link clarifies how to act as follows –

If you’ll deduct less than £2 million

Your company or group does not need to submit a Corporate Interest Restriction return. However, you must keep documents that show that your company or group will not deduct more than £2 million in net interest and financing costs in that period of account.

You can appoint a reporting company, which must then submit an abbreviated return. If you do, you can carry forward unused interest allowance for up to 5 years to reduce a future interest restriction, by replacing that abbreviated return with a full return for that period of account.


If you’ll deduct more than £2 million

You must work out your company’s or group’s ‘interest allowance’. This is the maximum amount of net interest and financing costs your company or group can deduct in a period of account.

You can use the ‘fixed ratio method’ or the ‘group ratio method’. Use the method that gives you the largest allowance. You must keep records of your calculation.

If your company’s or group’s net interest and financing costs are restricted, you should normally appoint a reporting company within 12 months of the end of the period of account, then submit a full Corporate Interest Restriction return.



Any substantial organisation that leases will be expected to conform to IFRS 16 with regard to accounting for all your leases but as a sizeable business if you are likely to deduct more than £2 million in net interest and financing costs when calculating UK Corporation Tax then you will need to retain the classification of your leases into operating and finance. You don’t need to worry if you are using a purpose-developed lease accounting system such as LLA from Innervision but if you are still reliant upon a spreadsheet solution then ready yourself for more spreadsheet calculations as you reinvent the wheel!

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Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.