Warning: corporate interest hazard ahead

15 April 2016

They said that they would do it and they have. As widely predicted the UK Government is introducing new rules to restrict deductions for interest costs incurred by companies. As the UK announces plans to lower corporate tax rates to a mere 17 per cent (‘borderline tax haven’ mutter unimpressed competitor jurisdictions) it is clear that the Treasury is keen to act tough on tax avoidance. Unfortunately innocent bystanders may lose out in the crossfire.

The impact

The changes could increase the UK corporate tax costs of many businesses by a material amount and will be introduced from April 2017. Businesses that are debt funded need to review their funding to identify whether potentially significant increases in corporate tax costs will result from the changes.

The proposals

The introduction of the measures follow the release of plans by the OECD to tackle international tax avoidance under its Base Erosion and Profit Shifting (BEPS) project. The UK is leading the global charge to enact many of the recommendations made. In this case, the rules will introduce a formula based approach to restrict tax deductible net interest deductions to 30 per cent of a UK group's ‘earnings before interest depreciation and amortisation’ (EBITDA). That's interest on all debt, not just the intra-group variety traditionally favoured by tax planners.

There are some reliefs including an overriding group ratio rule and a de minimis group threshold of £2m annual net UK interest expense before the restriction applies. Banks and insurance sectors will get their own rules and private investment in certain public projects will be subject to special reliefs. Then there will be additional relief to take account of earnings volatility. That's right, this is not going to be simple tax law. These rules add to the plethora of UK tax law relating to interest relief, although in a symbolic nod to tax simplification the complex and unloved worldwide debt cap rules will be repealed.

What next?

The proposed rules are subject to further consultation on design aspects and corporates that are impacted should keep abreast of developments. April 2017 is not that far away if you need to take action to reduce the effect of the changes.

For further information, please contact Ken Almand or your usual RSM adviser.