The tax impact of the withdrawal of LIBOR and other benchmark rates
Published 12 November 2020
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Who is likely to be affected
Businesses and individuals who are party to financial instruments, or leases, which use London Inter-Bank Offered Rate (LIBOR), or another similar benchmark rate, as a reference rate.
General description of the measure
Legislative changes will be made to amend three statutory references to LIBOR in the leasing provisions by referring to the ‘incremental borrowing rate’ instead of the relevant LIBOR rate. This rate is to be determined in accordance with generally accepted accounting practice.
In addition, a power will be introduced to allow any unintended tax consequences arising from the transition away from LIBOR and other benchmark rates by businesses and individuals to be addressed in secondary legislation.
Policy objective
The changes ensure that the leasing provisions continue to function as intended once LIBOR is withdrawn. In addition, the power will allow the government to respond outside of the Finance Bill timescales to any significant unforeseen tax issues that might emerge as businesses and individuals transition to the new benchmarks.
Background to the measure
A consultation looking at the tax impacts arising from the withdrawal of LIBOR was announced at Spring Budget 2020. It ran from 19 March 2020 to 28 August 2020.
Detailed proposal
Operative date
The measure will have effect from the date of Royal Assent to Finance Bill 2021.
Current law
There are three references to LIBOR in tax legislation dealing with leases. These use LIBOR as a fallback rate when an interest rate is required by the rules but the actual interest rate implicit in the lease cannot be determined. The sections affected are as follows:
- Section 70O, Capital Allowances Act (CAA) 2001
- Section 228MB, CAA 2001
- Section 437C, Corporation Tax Act (CTA) 2010
Section 70O, CAA 2001 requires a present value to be calculated using the interest rate implicit in the lease. If this rate cannot be determined, then section 70O stipulates that 12-month LIBOR plus 1% is to be used instead so that the necessary calculations can still be performed.
Section 228MB, CAA 2001 and section 437C, CTA 2010 set out how to calculate the present value of payments due under a lease. If the rate implicit in the lease cannot be determined, then 12-month LIBOR plus 1% is used as a fallback rate for the purpose of calculating the present value.
Proposed revisions
Finance Bill 2021 will amend the above sections to remove LIBOR as the fallback rate and replace it with the ‘incremental borrowing rate’ as determined by generally accepted accounting practice. This will ensure that the fallback provisions can continue to function once LIBOR is withdrawn.
In addition, Finance Bill 2021 will introduce a power to allow any unintended tax consequences arising from the transition away from LIBOR and other benchmark rates by businesses and individuals to be addressed in secondary legislation.
Summary of impacts
Exchequer impact (£ million)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
| - | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects businesses who are party to leases as part of the business. There is expected to be no impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure removes LIBOR as the fallback rate and replaces it with the ‘incremental borrowing rate’ as determined by generally accepted accounting practice. This ensures the fallback provisions can continue to function once LIBOR is withdrawn. This measure is expected to have a negligible impact on businesses as very few businesses use the fallback provisions. One-off costs will include familiarisation with the new rules. There are not expected to be any continuing costs.
Customer experience is expected to remain broadly the same as it does not change how businesses interact with HMRC. There are not expected to be any impacts on civil society organisations.
Operational impact (£ million) (HMRC or other)
There are no financial consequences for HMRC.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
The measure will be kept under review through communication with those businesses and professional bodies affected by the withdrawal.
Further advice
If you have any questions about this change, please contact Liang Tang on email: liang.tang@hmrc.gov.uk.