New rules are being introduced which impact UK companies that have interest or interest-like expenses. The new rules implement the OECD's recommendations and, once the second Finance Bill of 2017 receives Royal Assent, will apply retrospectively from 1 April 2017 to interest payments under both new and existing loans.
The thrust of the new rules is to limit tax relief on net interest expenses of up to 30 per cent of a group's UK tax EBIDTA for the relevant period or, if lower, the adjusted net interest expenses of the worldwide group. The new rules therefore fundamentally change the way in which UK corporates may claim interest (and interest-like) cost deductions in the UK. Historically, the deduction of corporate interest expenses from taxable profits has been broadly permitted to the extent that the interest costs are no greater than that which would have been payable on a loan lent by a third party on an arm's length basis. The new rules apply in addition to this traditional 'arm's length test' and are capable of changing the landscape significantly for businesses with borrowings.
In practice, the key points to note in respect of these new rules are:
- The first £2 million of the group's net UK interest expenses for each period is not restricted (which may mean that many businesses are unlikely to be affected by these new rules).
- Any disallowed tax expense in one period can be carried forward and used in a future period with sufficient headroom in the interest cap.
- There are specific rules for groups with high external gearing for genuine commercial reasons.
- Certain sectors also have bespoke rules, including infrastructure, real estate, oil and gas, charities, banking and insurance.
In addition to the substance of the rules, there are new reporting requirements imposed on companies affected by them. In particular, an interest restriction return will need to be made - and a reporting company will need to be appointed to submit this return if there is a group of companies. In the first year, the time limits for notifying HMRC of the appointment of a reporting company is 31 March 2018 and the deadline for the submission of an interest restriction return is 30 June 2018 (if it would otherwise have been earlier). In a group context, any company to whom the group's reporting company can allocate disallowed amounts of interest must also file a "consenting company return" with HMRC prior to the interest restriction return being filed.
As you might expect with legislation drafted following an extensive consultation process, the new rules are detailed and potentially far reaching, which means that they could have a significant impact on some businesses.