Changes to corporate interest relief

Interest on debt has for many years been deductible for corporation tax purposes, subject to certain anti-avoidance rules. From 1 April 2017 the deductibility of interest may be further restricted.

The 2017 Finance Bill originally presented to the House of Commons included provisions intended to restrict the tax deduction available to companies for interest payable from 1 April 2017. These provisions were due to be included in the 2017 Finance Act, however due to the June 2017 General Election, the Bill was much reduced and these rules were not included. It is likely that many of these provisions will return at a later date, subject to the outcome of the upcoming General Election.

The information below is subject to any further changes announced. Note also that the rules are very complex so what follows is necessarily a generalised summary.

Broadly, relief for a UK corporate group’s net interest expense will be capped at 30% of its taxable earnings before interest, tax, depreciation and amortisation (EBITDA). Where beneficial, an international group may alternatively elect to calculate the cap by reference to the ratio of the worldwide group’s net interest expense to its accounting EBITDA (the ‘group ratio’ cap).

All UK groups will benefit from an annual £2 million minimum net interest allowance. This means that groups whose net interest expense is below £2m will be unaffected and where a group is affected, it will always be able to deduct at least £2m.

There are further provisions that deal with the carrying forward of interest that has been restricted and provide for excess relief capacity to be carried forward. These matters are considered further in our factsheet.

The worldwide debt cap rules will be repealed and replaced by a ‘modified debt cap’ rule which broadly acts to ensure that a UK group’s net interest deduction initially capped under either the ‘30%’ or ‘group ratio’ cap mechanisms outlined above, secondly cannot exceed the net interest expense shown in 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 mitigate any projected disallowances. We would be happy to assist with this exercise.

For further advice on the above, please refer to our factsheet here and contact your usual Moore Stephens adviser.

 

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