Download Changes to corporate interest relief

Business tax
PRECISE. PROVEN. PERFORMANCE.
Changes to corporate interest relief
Overview
Where interest is restricted, it will be carried forward and will
Interest on debt has for many years generally been deductible
be available for utilisation in future years, subject to the same
for corporation tax purposes, subject to certain anti-avoidance
‘30%’ and ‘group ratio’ caps noted above. Furthermore, where
rules such as transfer pricing, thin capitalisation and the
a group does not incur sufficient interest to make use of the
worldwide debt cap. From 1 April 2017 the deductibility of
maximum amount of interest deductible in the period
interest may be further restricted.
(calculated by applying the caps as above), this excess capacity
can be carried forward for up to five years, increasing interest
The new restrictions will apply to interest, amounts economically
capacity for future accounting periods.
equivalent to interest and the costs of raising finance.
There are various additional provisions, such as those relating to
The 2017 Finance Bill originally presented to the House of
leases, securitisation vehicles, Real Estate Investment Trusts
Commons included provisions intended to restrict the tax
(REITs) and payments to charities.
deduction available to companies for interest payable from
1 April 2017. These provisions were due to be included in the
Interaction with existing restrictions
2017 Finance Act. However, because of the 2017 General
The rules relating to transfer pricing and thin capitalisation
Election the Bill was much reduced and these rules were not
remain unchanged. However, the worldwide debt cap rules will
included. Accordingly, they may never become law but
be repealed and replaced by a ‘modified debt cap’ rule which
nevertheless, we thought it useful to set out details of this
broadly acts to ensure that a UK group’s net interest deduction
important potential change given that if they are ultimately
initially capped under either the ‘30%’ or ‘group ratio’ cap
enacted, they could apply from 1 April 2017.
mechanisms outlined above, secondly cannot exceed the net
interest expense shown in the consolidated accounts for the
The information below is subject to any further changes
worldwide group.
announced. Note also that the rules are very complex so what
follows is necessarily a generalised summary.
How will these rules impact UK businesses?
Many sectors such as the property sector operate a highly
Summary of the new rules
geared business model and therefore the new restrictions could
Broadly, relief for a UK corporate group’s net interest expense
have a large impact on these businesses. Whilst a flat rate
will be capped at 30% of its taxable earnings before interest, tax,
restriction of 30% may appear somewhat punitive for many
depreciation and amortisation (EBITDA). These figures are taken
businesses with high external gearing, the ‘group ratio’ rule
from the UK corporation tax returns of each group company.
may offer greater or even full relief.
Where beneficial, an international group may alternatively elect
Note that qualifying interest incurred by certain companies
to calculate the cap by reference to the ratio of the worldwide
which carry out long-term public infrastructure projects is
group’s net interest expense to its accounting EBITDA (the
exempt from the regime.
‘group ratio’ cap). These figures are taken from the
consolidated accounts for the worldwide group.
Groups are advised to assess the impact of the new rules at an
early stage and consider whether any action can be taken to
All UK groups will benefit from an annual £2 million minimum
mitigate any projected disallowances. We would be happy to
net interest allowance. This means that groups whose net
assist with this exercise.
interest expense is below £2m will be unaffected and where a
group is affected, it will always be able to deduct at least £2m.
Business tax
PRECISE. PROVEN. PERFORMANCE.
Illustrated example
Consider the following scenario:
Company A
Company B
Company C
£10
£5
£25
£4
£1
£10
Tax and accounting EBITDA
Tax and accounting net interest expense
All amounts are in £millions and arise in the year ended 31 December 2018.
All companies are part of the same group; Companies A and
Note that the ‘modified debt cap’ could further restrict the
B are UK resident, and Company C is resident in France.
net interest expense allowed to the total net interest expense
for the worldwide group of £15m. However, as the ‘30% cap’
Under the ‘30% cap’ rule the maximum UK interest deduction
and ‘group ratio’ do not exceed £15m, this further restriction
available to the group is £4.5 million, which is calculated as
does not bite.
30% x £15 million (total EBITDA for UK companies).
Whilst this serves to illustrate the potential advantages of
However, if a ‘group ratio’ election is made the maximum
making the ‘group ratio’ election, there are many factors to
deduction is £5.625 million, which is calculated as £15
consider and a number of other elections that can be made.
million/£40 million (the ‘group ratio’ i.e. total worldwide net
In addition, various assumptions have been made, such as
interest expense/total worldwide EBITDA) x £15 million (total
accounting and tax figures being the same, which may not be
EBITDA for UK companies).
the case in practice.
So by making the election, the cap is increased from £4.5m
to £5.625m and the UK group can deduct the whole of its
£5m net interest expense.
The new regime promises to add an additional layer of
complexity in making funding decisions and advice should
always be sought.
For further advice on the above, please contact your
usual Moore Stephens adviser:
www.moorestephens.co.uk
We believe the information in this factsheet to be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or
refraining from action as a result of any item herein. Printed and published by © Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of
independent firms. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated
by the Financial Conduct Authority for investment business. DPS35579 May 2017