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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 Accordingly, they may never become law but be repealed and replaced by a ‘modified debt cap’ rule which nevertheless, we thought it useful to set out details of this broadly acts to ensure that a UK group’s net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