The corporate interest restriction limits how much net interest and other financing cost a company or group can deduct for Corporation Tax. It only bites where the worldwide group’s net interest expense is more than £2 million a year; above that, deductions are generally capped at 30% of the group’s UK tax EBITDA or a group ratio. A reporting company handles the group’s returns and elections, and the appointment rules changed for periods of account ending on or after 31 March 2026.

Which companies does the restriction apply to?

The rules are in Part 10 of, and Schedule 7A to, the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), introduced by Finance (No. 2) Act 2017. HMRC’s Corporate Finance Manual at CFM95110 explains that they apply to all companies within the charge to Corporation Tax, for periods of account starting on or after 1 April 2017, with the aim of keeping interest deductions in line with the activities taxed in the UK and the group’s borrowing from third parties.

Everything is measured for a worldwide group. Under section 473, that is the ultimate parent and its consolidated subsidiaries, determined under international accounting standards. A company with no subsidiaries that is not itself consolidated into a group is a single company worldwide group, so a standalone company is tested on its own figures. CFM95140 adds that the rules apply mechanically with no purpose test, and that they run after most other tax rules, such as transfer pricing, but before the loss restriction rules.

The figures start from what the loan relationships rules allow. If you need the basics of how interest is taxed first, see loan relationships.

How does the £2 million de minimis work?

A group is subject to interest restrictions in a period of account if its aggregate net tax interest expense exceeds its interest capacity (section 373). Under section 392 the interest capacity is the interest allowance for the period plus unused allowance brought forward, but it is never less than the de minimis amount of £2 million, proportionately increased or reduced for a period longer or shorter than a year.

Two practical consequences follow. First, the £2 million is a group figure, not a per company allowance; splitting borrowing across subsidiaries does not multiply it. Second, a group whose net interest expense is £2 million or less for the year suffers no restriction. HMRC’s guidance says such a group does not need to submit a return but must keep documents showing that it will not deduct more than £2 million of net interest and financing costs in that period of account. CFM95110 describes this as taking reasonable care to establish that the group is below the limit.

How is the interest allowance worked out?

There are two methods, and a group uses whichever gives the larger allowance.

Fixed ratio method

Under section 397 the basic interest allowance is the lower of:

  • 30% of the group’s aggregate tax EBITDA; and
  • the fixed ratio debt cap, which under section 400 is the group’s adjusted net group interest expense (broadly its net external interest shown in the consolidated accounts) plus any excess debt cap carried from the previous period.

HMRC’s guidance describes tax EBITDA as the UK taxable profits before interest, taxes, capital allowances and some other tax reliefs. The debt cap stops a group deducting more UK interest than it pays to the outside world.

Group ratio method

Highly geared groups can elect, in a return, for the group ratio method under section 398. In outline it applies the ratio of the group’s net interest owed to unrelated parties to its accounting EBITDA, and multiplies that by the UK tax EBITDA, again subject to a debt cap. The election can only be made through a reporting company.

Under section 396, the interest allowance is the basic allowance from whichever method applies plus any aggregate net tax interest income of the group.

What happens to disallowed interest and unused allowance?

Disallowed interest is not lost. Section 378 carries it forward, and HMRC explains at CFM98230 that it becomes an attribute of the individual UK company and can be carried forward indefinitely until it is reactivated in a later period with spare capacity. It expires if the company stops the trade or investment business it relates to, if that activity becomes small or negligible, or, for trading amounts, if the trade becomes uncommercial and non statutory.

Unused interest allowance is carried forward at group level for up to five years (CFM98240). There is a condition: the allowance is only available later if a full interest restriction return was submitted for the period in which it arose. An abbreviated return is not enough on its own, but CFM98440 explains that a group which has filed an abbreviated return can replace it with a full return up to 60 months after the end of the period.

What is the reporting company and how is it appointed?

The reporting company files the group’s interest restriction return and makes its elections. HMRC’s guidance says it must be liable to UK Corporation Tax, not dormant, and authorised by the group’s non dormant companies that are liable to Corporation Tax. You need one if you want to allocate disallowed amounts to particular companies, carry forward unused allowance, reactivate earlier disallowances or make an election such as the group ratio method.

Point Period of account ending on or before 30 March 2026 Period of account ending on or after 31 March 2026
When to appoint Within 12 months of the end of the first period of account; carries forward to later periods For each period, with no time limit
Authorisation needed At least 50% of non dormant group companies At least 50.01% of non dormant group companies
Telling HMRC Commercial software or the online form On the interest restriction return itself
Returns A return for every period once appointed, even with no restriction Only where allocating disallowances, carrying forward allowance, reactivating or electing

What are the deadlines and penalties?

The reporting company must submit the return within 12 months of the end of the period of account it covers, electronically through commercial software or HMRC’s online form. HMRC’s guidance sets out the penalties:

  • £500 if the return is up to three months late;
  • £1,000 if it is more than three months late;
  • up to 100% of the extra tax, or reduced relief, for an inaccurate return, depending on the type of error and whether it was disclosed before HMRC found it;
  • for periods of account ending on or after 31 March 2026, a £1,000 penalty where the reporting company was not correctly appointed when the return was submitted and HMRC makes contact before the mistake is corrected.

The return deadline sits alongside the normal company return dates; see Corporation Tax deadlines.

How does it work in practice?

Illustration only. A UK group has aggregate tax EBITDA of £10 million and net interest expense of £4 million, all paid to its bank, with nothing brought forward.

  • 30% of tax EBITDA is £3 million. The debt cap is the £4 million net external interest. The interest allowance is the lower figure, £3 million.
  • Interest capacity is £3 million, which is above the £2 million de minimis.
  • £1 million is disallowed. The reporting company allocates it among the UK companies in the return, and each company carries its share forward for possible reactivation.

If instead tax EBITDA had been £5 million, 30% would give only £1.5 million, but interest capacity cannot fall below £2 million, so £2 million would be deductible and £2 million disallowed. If net interest expense had been £1.8 million, there would be no restriction at all.

What mistakes come up most often?

  • Treating the £2 million as per company. It is one figure for the whole worldwide group, so UK subsidiaries of the same overseas parent share it.
  • Keeping no evidence below the limit. Groups near £2 million should keep a workings file each year.
  • Losing allowance by not filing. A group with spare capacity that never files a full return cannot use that allowance later.
  • Applying the old appointment rules to new periods. For periods ending on or after 31 March 2026 the appointment is per period and is reported on the return.
  • Forgetting related rules. Interest between group members is still subject to transfer pricing first; see intercompany loans. Property groups with heavy borrowing, including buy to let companies in larger groups, can reach the threshold sooner than expected. CFM95140 notes that groups providing public infrastructure can elect into a different approach, where no de minimis applies.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.