These changes could increase the UK corporate tax costs of many businesses by a material amount and they may be introduced as soon as 2017. The potential changes to the rules follow the release of plans by the OECD to tackle international tax avoidance under its Base Erosion and Profit Shifting (BEPS) project. These plans include recommendations for countries to adopt a formulaic based approach to restrict interest deductions. If adopted this method would restrict interest deductions for many corporates more than the current statute and will almost certainly prove less generous.
The UK’s reaction
The Government has trumpeted the UK’s interest regime as business friendly but also wants to be seen to be tackling potential tax avoidance activity. It seems the Government considers the OECD plan an appropriate response to the issue of tax avoidance facilitated by interest deductions. However, it recognises that the OECD recommended revisions to the rules would constitute a major change to the UK tax system. This is not least because the current rules are considered to be relatively generous compared to many other countries and have contributed to attracting investment into the UK. The Government has therefore launched a consultation to seek public opinion.
What is proposed?
The proposals from the OECD focus on best practice recommendations with interest claimable restricted to a fixed percentage of a group’s EBITDA. The test would be applied at either a company or group level with the OECD’s recommended percentage being between 10 per cent and 30 per cent of EBITDA. It would be a decision for the Government as to what the percentage limit would be if this approach were to be adopted.
The consultation envisages special rules for the banking and insurance sectors but not for other industries. There is a risk that groups in sectors that feature highly geared structures would be particularly exposed as a result of any rule changes, particularly as the consultation envisages that grandfathering for existing loans would only be available in exceptional circumstances.
So what should businesses do now?
RSM will be responding to the consultation, and you may also wish to make representations on the proposals before the consultation closes on 14 January 2016. If you are concerned about these changes, RSM can review the potential impact of the proposals on your financing structures and assess possible alternatives to suit your business.
For further information please contact Ken Almand.