LONDON: It is expected that new rules restricting tax deductions for corporate interest payments will apply from 1 April 2017, even though the announcement of the June UK general election has delayed the passing of the necessary law. The draft legislation was included in the version of the Finance Bill 2017 which was published in March 2017. However, following the decision to hold a general election on 8 June 2017, the new rules were removed from the final version of the bill, which became law at the end of April 2017. The rules are detailed and complex and so this update provides only a brief outline. It is based on the Finance Bill legislation published on 20 March and the draft HMRC guidance issued on 31 March 2017 – both of which could change.
In the parliamentary debate on the Finance Bill, the financial secretary to the treasury said that a Conservative government would legislate for the provisions removed from the bill, “at the earliest opportunity, at the start of the new Parliament”. Irrespective of the outcome of the election, it is likely that the provisions will be enacted this year and the expectation is that they will still take effect from 1 April 2017. Prior to April 1, 2017, the UK had generous rules in relation to tax relief on corporate interest payments. Subject to a number of anti-avoidance provisions, interest paid on debt financing was generally deductible from a company’s UK corporation tax profits and therefore a company’s liability to UK corporation tax was reduced.
The new rules are a response to the recommendations made by the Organisation for Economic Cooperation and Development (OECD) in connection with its base erosion and profit shifting (BEPS) project, designed to reduce tax avoidance by multinationals. The rules are intended to prevent multinationals from loading up UK companies with high levels of debt to reduce taxable profits, whilst shifting business profits to low tax jurisdictions, such as tax havens, so little or no tax is paid. However, the restriction will catch commercial transactions as well as those with a tax avoidance motive.
