Interest restriction gets more complex

Corporates which enjoy tax relief on interest payments are faced with even more complex restriction rules than first thought, although there is better news for some.

The new rules on corporate interest restrictions take effect in three weeks’ time. Though simple in theory, the rules are fiendishly complex – and the Chancellor has now announced further changes. These will benefit some, which is to be welcomed, but fall short of what many corporates might have wished for.

Flagged as a measure to curb corporate tax planning the interest restriction rules have been the subject of a long consultation with legislation running into hundreds of pages. They are predicted to collect billions of pounds of additional revenue for the Treasury in coming years. A number of potential inconsistencies have been identified in these rules and the government has now acted to address some of them. This is good news albeit for a relatively small number of taxpayers who may be affected.

The announcement removes restrictions that could have unintentionally reduced loss carried forward and also provides potential relief for guarantee arrangements although generally only for those entered into by 31 March this year. The changes also assist corporates in the banking sector to define interest and insurance firms in calculating it. The calculations for infrastructure companies should also be more straightforward to apply.

The changes are to be welcomed in that they remove some unintended consequences of the legislation, however for many middle and large size businesses they will not ease the pain of the new rules which will significantly reduce the deductions from profits and increase corporate tax bills.

Many corporates who pay interest will pay more tax as a result of the new rules. They should check not only to see if the announcement impacts them but also ensure that they fully understand the impact of the rules.

For more information please get in touch with Ken Almand, or your usual RSM contact.