Government predicts £4bn yield from interest deductibility rule
The government expects to claw back approximately £3.96bn by 2020/21 through the introduction of restrictions to interest deductibility for corporates in the Finance Bill 2017
6 Dec 2016
Under the regime, part of the UK’s efforts in the OECD’s Base Erosion and Profit Shifting (BEPS) project, there will be a limit to the tax deductions large groups can claim for their UK interest expenses from April 2017.
The rules will limit deductions where a group has net interest expenses of more than £2m, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group.
The government projects it will receive £920m in 2017/18, £1.17bn in 2018/19, £995m in 2019/20 and £885m in 2020/21.
The move’s policy paper shows a fixed ratio rule will limit the amount of net interest expense that a worldwide group can deduct against its taxable profits to 30% of its taxable earnings before interest, taxes, depreciation, and amortisation (EBITDA).
A modified debt cap within the new rules is designed to ensure the net interest deduction does not exceed the total net interest expense of the worldwide group.
The group ratio rule allows a ‘group ratio’ to be substituted for the 30% figure. This is based on the net interest expense to EBITDA ratio for the worldwide group based on its consolidated accounts.
The public benefit infrastructure exemption provides an exemption for qualifying interest expense incurred by qualifying companies on funds invested in long-term infrastructure projects for the public benefit.
Rules are in place to clarify timing discrepancies between interest expense and EBITDA. Amounts of restricted interest can be carried forward indefinitely. They may be deducted in a later period if there is sufficient interest allowance. Unused interest allowance can be carried forward for up to five years.
The government predicts up to 3,800 large businesses operating in the UK will be affected, many of which will be multinationals. The £2m threshold for net interest expense is expected to exclude 95% of groups from the rules, however.
Moreover, the government suggests in its policy paper that one-off costs of familiarising businesses with the rules and compliance could run as high as £16m, with an annual cost thereafter of around £1m.
The policy paper Corporation Tax: tax deductibility of corporate interest expense can be read here.