On 3 December 2014, the government announced that it would introduce a new exemption from the requirement to deduct tax at source from yearly interest where the interest is paid on a ‘qualifying private placement’. The intention is to unlock a new source of financing for mid-sized UK borrowers, reducing their dependency on the banking system.
Under the current rules, broadly a UK company is required to deduct income tax from interest payments that it makes and pay the income tax over to HMRC. There are a number of exemptions, including where the interest is paid to a UK bank or UK branch of an overseas bank and where the security is listed on a recognised stock exchange (the quoted Eurobond exemption). If the interest is paid to an overseas lender, the withholding tax may be reduced or eliminated if there is treaty relief under a suitable double tax treaty.
The new rules introduce a further exemption aimed at plain vanilla forms of debt issued to an unconnected party which is a UK regulated financial institution or an equivalent overseas entity, without the need for the security to be listed on a stock exchange or for treaty relief to be claimed. In order to qualify for this exemption, a number of conditions must be satisfied:
- the terms of the loan must not provide for the loan to be terminated within a three year period;
- the security must not be listed on a recognised stock exchange;
- the placement must meet other conditions as set out the Treasury in regulations to be introduced.
It is currently proposed that the regulations will set out the following further conditions:
Issuer of the security
The issuer of the security must be a ‘trading company’ as defined. This means that the company or group must not carry on a ‘substantial’ amount of non-trading activities, such as investment activities. ‘Substantial’ is interpreted by HMRC as meaning more than 20%. It is not currently clear whether the issuer can be a holding company of a trading group.
The qualifying private placement made by an individual company must be between £10 million and £300 million.
Holder of the security
The holder of the security must:
Conditions applying to the security
- not be connected with the issuer of the security;
- must be a UK regulated financial institution, or an equivalent entity authorised outside the UK carrying on as a substantially similar business. An equivalent entity is required to be resident in a ‘qualifying territory’, which is a territory with which the UK has a double taxation treaty which includes an appropriate non-discrimination article.
The regulations will include certain conditions intended to ensure that the exemption applies at market – standard, plain vanilla forms of debt. It is envisaged that the instrument must:
Securities held for an unallowable purpose
- be unsubordinated to any existing unsecured debt of the issuer;
- have a maturity of between 3 and 30 years;
- pay interest at a normal commercial rate;
- be issued in a minimum denomination of £100,000;have no right to conversion into shares of the issuing company.
The security must be issued and held for genuine commercial reasons, and not be part of a tax advantage scheme. A tax advantage scheme is a scheme the main purpose, or one of the main purposes, of which is to obtain a tax advantage.
There will be additional regulations providing for the consequences of the placement terminating within a specified period.
The new relief is generally being welcomed as this should make it easier for medium-sized UK borrowers to obtain third party funding.
For further information, please contact your nearest Moore Stephens business tax adviser
Business Tax team