Restrictions on Corporation Tax Relief for Interest Costs - An Update

HMRC has published the latest version of draft legislation which restricts the amount of interest costs companies can claim tax relief on.  Although this is still draft legislation, it's important to be aware that the rules take effect for interest costs from 1 April 2017.

Broadly, the rules contain the following provisions to restrict the amount of interest costs a company can deduct against profits for the purposes of computing corporation tax.  Note that `interest’ has a fairly broad definition and includes most types of financing costs.

The rules are:-

• a de minimis level of £2m will apply, so groups can deduct the first £2m of interest expense without restriction.
• A ‘fixed ratio’ applies in excess of this level which restricts deductions to 30% of EBITDA (earnings before interest, tax, depreciation and amortisation)
• alternatively, a worldwide group can calculate its own worldwide interest expense to group EBITDA ratio, and apply this percentage to UK EBITDA to give a higher amount of interest deduction. There is a further `debt cap’ test to ensure the UK tax deduction is not greater than the net external financing costs of the group.

There are proposals to allow the carry forward of disallowed interest costs and make it available as a deduction in future periods if there is EBITDA capacity.  This should particularly help highly geared UK groups with volatile profitability.

The new rules are introduced as part of the OECD’s recommendations in BEPS Action 4 and do contain some significant complexity in the computational rules. 

Any company or group with finance costs approaching £2m or above should seek specialist advice in order to manage the tax impact.

If your business is likely to be affected and you would like to discuss the next steps should the draft legislation come into effect please contact me for advice.