Avoid tax surprises for business borrowings

17 May 2024

When it comes to paying interest, there are some common mistakes and oversights that businesses should ensure don’t apply to them, to avoid unexpected tax liabilities.

Corporate interest restriction (CIR) 

The CIR legislation restricts the level of UK tax deductions for interest and other financing costs that may be taken by groups of companies (or single company groups) in certain circumstances where relevant expenditure in a year exceeds £2m. HMRC has recently flagged several common errors it has seen with respect to the CIR, including:

  • reporting company appointments being submitted late;
  • no new reporting company appointment being made where the ultimate parent of a CIR group changes;
  • incorrect treatment of foreign exchange movements; and
  • incorrect calculations where double tax relief is in point.

All of the above errors and/or omissions can lead to incorrect reporting, which can result in very serious consequences for some affected businesses including potentially significant additional tax liabilities and penalties.

CT61 forms

Companies may be required to withhold income tax at source on interest payments. Where a withholding obligation arises, the necessary tax must be deducted from the payment, reported and paid over to HMRC within 14 days of the end of the relevant calendar quarter or accounting period, using form CT61. It’s important for businesses to understand when a withholding tax obligation could arise, and whether this can be mitigated and/or the amount of tax reduced, in advance of the obligation arising.

Double tax relief

Companies and other persons resident in a country with which the UK has a double taxation treaty may be able to claim exemption or partial relief from the obligation to account for UK withholding tax on payments of interest by way of an advance clearance application. The relief available depends on the terms of the relevant treaty, and HMRC must be satisfied that an application is validly made. Businesses must, however, take care to monitor the expiration of any advance withholding tax clearances, particularly where the term of any loan is extended, as clearance is typically granted for a limited period. The Double Taxation Treaty Passport Scheme (DTTPS) also provides for double taxation relief on UK source loan interest payments to some overseas lenders. It can often be a more efficient route where there are multiple UK borrowers and one overseas lender, and businesses should therefore perform a holistic review of their approach to mitigating potential double taxation.

Transfer pricing and unallowable purpose

Assessing the UK tax treatment of interest arising on loans ‘pushed down’ to or involving UK intermediate entities as part of an investment holding structure should also be carefully considered, as demonstrated in the recent Court of Appeal case of BlackRock HoldCo 5, LLC v HMRC. In this case, a US business was acquired by another US-headquartered business and the group hoped to achieve a tax benefit by including a UK resident entity within the acquisition structure. HMRC disputed the UK tax deductibility of interest expenses arising on intra-group loans to the UK entity, raising arguments from both a transfer pricing and an unallowable purpose perspective. HMRC successfully argued that the structure was driven by tax considerations with a purpose of obtaining UK tax relief for interest expenses, which meant that there was an unallowable purpose to which all of the interest debits fell to be apportioned.

Avoiding nasty surprises

Businesses should perform regular reviews where interest expenses are in point, to ensure they have identified all of the associated tax issues and are comfortable that all reporting requirements are up to date and correct. It is also important to ensure that the necessary documentation is in place to support deductions claimed in respect of interest expenses, so that it can be produced if called for by HMRC.

For more information, please get in touch with Suze McDonald or your usual RSM contact.