Who is likely to be affected
Large businesses within the charge to Corporation Tax (CT) which incur net interest expense and other similar financing costs (within the scope of CT) above £2million per annum.
General description of the measure
From 1 April 2017, the UK will introduce new rules to limit tax deductions for interest expense and other similar financing costs, with the aim of aligning such deductions with the economic activities undertaken in the UK. The existing Debt Cap rules will be repealed and replaced with the new rules.
The new rules will restrict the ability of large businesses to reduce their taxable profits through excessive UK interest expense. They are part of the government’s wider changes to encourage alignment of the location of taxable profits with the location of economic activity, and are consistent with the UK’s more territorial approach to corporate taxation.
Background to the measure
The OECD published recommendations on preventing base erosion through the use of interest expense in October 2015 under Action 4 of the Base Erosion and Profit Shifting (BEPS) Project. The government undertook an initial consultation on how the OECD recommendations could be implemented domestically from 22 October 2015 to 14 January 2016.
At Budget 2016 the government announced that it would introduce new rules to limit the tax deductibility of corporate interest expense consistent with the OECD recommendations, effective from 1 April 2017.
A second government consultation, on the detailed design and implementation of the rules, ran from 12 May 2016 to 4 August 2016.
The measure will have effect from 1 April 2017. Where a worldwide group has a period of account (as defined for the purposes of the interest restriction rules) that spans that date, it will have to split the results of the period so that the new rules have effect from 1 April 2017.
The loan relationship regime at Part 5 of Corporation Tax Act 2009 provides the current rules on corporate interest deductions. A number of other provisions deal with amounts that are equivalent to interest. The current Debt Cap rules are at Part 7 of Taxation (International and Other Provisions) Act 2010 (TIOPA).
Legislation will be introduced in Finance Bill 2017 to be inserted into TIOPA, and will provide for repeal of the current Debt Cap rules. The main elements of the new rules are as follows.
The rules will operate on a worldwide group basis to allow groups to manage any restriction across their businesses. They will apply to the net interest expense within the charge to CT, including other similar financing costs. Groups with less than £2million of net interest expense within the scope of CT per annum will not need to apply the rules.
The 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 will 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. The group ratio 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.
There are rules to help address timing differences between interest expense and EBITDA. Amounts of restricted interest are 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 5 years.
There are special rules to deal with particular issues, for example: related parties, joint ventures, leases, securitisation vehicles, Real Estate Investment Trusts, payments to charities, the Oil and Gas tax regime, Double Taxation Relief, and the Northern Ireland CT rate.
Summary of impacts
Exchequer impact (£m)
|2016 to 2017||2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021|
These figures are set out in Table 2.1 of Budget 2016 as ‘Corporation Tax: restrict relief for interest’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Groups that have engaged in aggressive tax planning using debt to reduce their tax bill may face a higher cost of capital. This measure may also increase the cost of capital for large multinational businesses that have proportionately higher borrowing in the UK compared with the rest of the worldwide group, as it may restrict the amount of corporate interest payments allowed to be offset against corporation tax liability. A higher cost of capital could affect investment decisions and make some marginal investments uneconomic.
This measure helps address competitive distortions between multinational and domestic businesses (see competition assessment below).
Impact on individuals, households and families
This measure is not expected to directly impact on individuals or households. The measure is not expected to impact on family formation, stability or breakdown.
This measure is not expected to impact on any of the groups with protected characteristic.
Impact on business including civil society organisations
This measure is expected to have a significant impact on businesses. It is estimated to affect up to 3,800 large businesses operating in the UK, many of which will be multinationals. The £2million threshold for net interest expense is expected to exclude 95% of groups from the rules, including the vast majority of small businesses. Groups with net interest expense below (but close to) £2million will need to do some work to verify that they are outside of the scope of the rules. This has been factored into the cost estimates below.
Businesses may incur one-off costs in familiarising themselves with the new interest restriction rules, making systems changes and obtaining advice and assurance on how to comply with the rules. These one-off costs are estimated to be around £16million. The on-going impact on the administrative burden for business is estimated to be £1million a year, with a £6.4million cost from the interest restriction rules offset by a £5.4million saving from repeal of the existing worldwide debt cap. Individual businesses could experience an increase or decrease in on-going costs, depending on the balance of these effects.
There is no impact on civil society organisations.
The estimated one-off and on-going costs are set out in the tables below.
Estimated one-off impact on administrative burden (£m)
Estimated on-going impact on administrative burden (£m)
|Ongoing average annual impact||(£m)|
|Net impact on annual administrative burden||1.0|
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be a one-off Information Technology cost to HMRC of approximately £300,000 to implement this measure.
Competition assessment, by tackling base erosion and profit shifting through the use of interest expense, this measure helps to reduce competitive distortions between groups operating internationally - who have more opportunities for aggressive tax planning - and wholly or mainly domestic businesses.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored to ensure the legislation is operating as intended and kept under review through regular communication with affected taxpayer groups.
If you have any questions about this change, please contact the Corporate Interest Restriction Team via email: firstname.lastname@example.org or on Telephone: 03000 569068.