Late paid interest rules from 1 January 2016

The 2015 Finance Act introduced changes to the way tax relief is given, to interest payable on certain connected party loans. 

Under the rules (applying up to 31 December 2015), interest which remains unpaid for 12 months after the end of the accounting period in which it was accrued is treated as ‘late’. As such it is deductible only in the period in which payment is made, rather than the period during which it was accrued. The late paid interest rules apply where the lender and borrower are connected and the lending company is resident in a ‘non-qualifying territory’, broadly, an offshore tax haven.

From 1 January 2016, the late paid interest rules are amended to bring the tax treatment in line with the accounting treatment, so that relief is available on an accruals basis. Interest (or discount, in the case of deep discount securities) accruing on or after 1 January 2016 will follow the accruals basis, irrespective of the date the loan was entered into.

Interest payable on loans agreed after 3 December 2014, or substantially modified after that date but before 1 January 2016, fall within the accruals basis from the date the loan was agreed or substantially modified.

To find out how the legislation affects your business, please contact a member of the Moore Stephens team.