HMRC has published a revised version of draft Finance Bill legislation containing the rules to restrict the amount of interest expense that companies can deduct with effect from 1 April 2017.
Draft Finance Bill legislation introducing new rules to restrict the amount of interest and other financing amounts a company may deduct in computing its profits for corporation tax purposes was published on 5 December (cl 21 and Sch 7). The draft legislation contained the core rules, based on the OECD’s recommendations in BEPS Action 4:
a de minimis threshold will allow all groups to deduct up to £2m of net interest expense in the UK per annum;
above this, a fixed-ratio rule will restrict deductions for net interest expense to 30% of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA) in the UK; or
if higher, a group-ratio rule will allow a proportionate share of the worldwide group’s net interest expense, equal to UK taxable EBITDA multiplied by the ratio of worldwide net interest expense to worldwide EBITDA, with a modified debt cap to ensure the net interest deduction does not exceed the total net interest expense of the worldwide group.
Following consultation, and comments received on the first draft, the government has made certain detailed policy changes which are reflected in the latest draft. These changes include the following:
the public infrastructure rules will now require a prospective election, revocable after a minimum of five years, then not renewable within a further five years;
if a company does not comply in any accounting period with all the conditions of the public infrastructure rules, and this non-compliance has not been contrived with a main purpose of obtaining a tax advantage, the public infrastructure rules will not apply to that company in that period, meaning that any interest income and EBITDA of the company will not be excluded when calculating how much interest the group can deduct under the main rules;
the list of tax reliefs to be disregarded in calculating tax-EBITDA is extended to include certain reliefs for the creative industries, namely, film tax relief, television tax relief, video games tax relief, relief in relation to theatrical productions, orchestra tax relief, and museums and galleries exhibition tax relief;
there will be no rules specifying how much of the restriction is to be allocated to interest expense to which the Northern Ireland rate of corporation tax applies;
the regime-wide anti-avoidance rule will not apply to certain ‘commercial restructuring arrangements’, covering cases where loan receivables held offshore are transferred to be within the charge to corporation tax and where there is straightforward restructuring to benefit from the legitimate use of reliefs within the interest restriction rules;
if a group has aggregate net tax-interest income for a period it is added to the interest allowance for that period, meaning that carried-forward interest amounts will be able to be deducted in subsequent periods to the extent they can be set off against net tax-interest income in those periods; and
groups may make an irrevocable ‘alternative calculation’ election to make certain prescribed adjustments to the accounting figures to more closely align them with how amounts of ‘interest’ and ‘EBITDA’ would be calculated under UK tax rules, having effect for both the modified debt cap rule and the group ratio rule.
Comments on the draft legislation should be sent by 23 February.
The following changes will be made by secondary legislation and draft regulations will be published for comment:
‘interest distributions’ under regs 18, 69Z16 and 69Z61 of the Authorised Investment Funds (Tax) Regulations, SI 2006/964, will not be amounts of tax-interest expense;
‘interest distributions’ under reg 5 of the Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations, SI 2009/2034, will not be amounts of tax-interest expense;
the retained profit of a company within the Taxation of Securitisation Companies Regulations, SI 2006/3296, will be treated as an amount of tax-interest income; and
the exclusion of expense amounts from results-dependent securities from qualifying net group-interest expense under section 410(3)(b) will not apply to instruments issued by a company within the Taxation of Securitisation Companies Regulations, SI 2006/3296.
HMRC has published a revised version of draft Finance Bill legislation containing the rules to restrict the amount of interest expense that companies can deduct with effect from 1 April 2017.
Draft Finance Bill legislation introducing new rules to restrict the amount of interest and other financing amounts a company may deduct in computing its profits for corporation tax purposes was published on 5 December (cl 21 and Sch 7). The draft legislation contained the core rules, based on the OECD’s recommendations in BEPS Action 4:
a de minimis threshold will allow all groups to deduct up to £2m of net interest expense in the UK per annum;
above this, a fixed-ratio rule will restrict deductions for net interest expense to 30% of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA) in the UK; or
if higher, a group-ratio rule will allow a proportionate share of the worldwide group’s net interest expense, equal to UK taxable EBITDA multiplied by the ratio of worldwide net interest expense to worldwide EBITDA, with a modified debt cap to ensure the net interest deduction does not exceed the total net interest expense of the worldwide group.
Following consultation, and comments received on the first draft, the government has made certain detailed policy changes which are reflected in the latest draft. These changes include the following:
the public infrastructure rules will now require a prospective election, revocable after a minimum of five years, then not renewable within a further five years;
if a company does not comply in any accounting period with all the conditions of the public infrastructure rules, and this non-compliance has not been contrived with a main purpose of obtaining a tax advantage, the public infrastructure rules will not apply to that company in that period, meaning that any interest income and EBITDA of the company will not be excluded when calculating how much interest the group can deduct under the main rules;
the list of tax reliefs to be disregarded in calculating tax-EBITDA is extended to include certain reliefs for the creative industries, namely, film tax relief, television tax relief, video games tax relief, relief in relation to theatrical productions, orchestra tax relief, and museums and galleries exhibition tax relief;
there will be no rules specifying how much of the restriction is to be allocated to interest expense to which the Northern Ireland rate of corporation tax applies;
the regime-wide anti-avoidance rule will not apply to certain ‘commercial restructuring arrangements’, covering cases where loan receivables held offshore are transferred to be within the charge to corporation tax and where there is straightforward restructuring to benefit from the legitimate use of reliefs within the interest restriction rules;
if a group has aggregate net tax-interest income for a period it is added to the interest allowance for that period, meaning that carried-forward interest amounts will be able to be deducted in subsequent periods to the extent they can be set off against net tax-interest income in those periods; and
groups may make an irrevocable ‘alternative calculation’ election to make certain prescribed adjustments to the accounting figures to more closely align them with how amounts of ‘interest’ and ‘EBITDA’ would be calculated under UK tax rules, having effect for both the modified debt cap rule and the group ratio rule.
Comments on the draft legislation should be sent by 23 February.
The following changes will be made by secondary legislation and draft regulations will be published for comment:
‘interest distributions’ under regs 18, 69Z16 and 69Z61 of the Authorised Investment Funds (Tax) Regulations, SI 2006/964, will not be amounts of tax-interest expense;
‘interest distributions’ under reg 5 of the Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations, SI 2009/2034, will not be amounts of tax-interest expense;
the retained profit of a company within the Taxation of Securitisation Companies Regulations, SI 2006/3296, will be treated as an amount of tax-interest income; and
the exclusion of expense amounts from results-dependent securities from qualifying net group-interest expense under section 410(3)(b) will not apply to instruments issued by a company within the Taxation of Securitisation Companies Regulations, SI 2006/3296.
