Tax deductibility of corporate interest expense - CIOT comments

By Technical Team on 14 Jan 2016

On 22 October 2015, HMT published a consultation document on Tax deductibility of corporate interest expense. This consultation seeks views on the proposals to tackle Action 4 of the Base Erosion Profits Shifting project, set out in the OECD report on Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.

HMT/HMRC held a Consultation Event on 14 December 2015 which we attended and our response to the consultation also reflects the discussions on that day.

The proposals in the consultation document are around a structural interest restriction.  It is acknowledged that this would be a significant change for the UK’s corporate tax system. 

In our response we first questioned whether a structural interest restriction along the lines being considered is necessary at all in the UK, given that the concerns which led to this aspect of the BEPS Action Plan are either not relevant to the UK or have been addressed by other aspects of the BEPS Action Plan and/or existing UK tax rules.  However, we noted that the UK Government is currently minded to introduce such a structural interest restriction in the UK, and we can see some merit in having rules which are consistent with those which are introduced by other countries, but this will only be the case if other countries do also implement similar rules.

We noted that the key feature for any such regime is that interest on third party debt should not be restricted.  We also advocated repealing some of the other existing rules currently applying to interest in order that there is not simply new complex rules added to the statute book.  Primarily, the world-wide debt cap should be abolished.  

We also strongly urged the Government to delay any implementation of a structural interest regime from the proposed date of 1 April 2017, to ensure the end result reflects proper consideration all the issues and complexities.  The aim must be to arrive at a regime which best achieves the stated policy objectives of tackling BEPS involving interest expense while maintaining the competitiveness of the UK tax system, ensuring that there is certainty for businesses operating in the UK and giving greatest efficiency in terms of business compliance and government administration.  An accelerated timetable of change which rushes in a regime which does not work well could be unhelpful to the UK’s competiveness.

Our response favoured a group ratio rule as well as the fixed ratio rule, and also suggested that a widely drafted public benefit project exclusion would be necessary to ensure that the regime did properly target only groups and businesses which were a high BEPS risk. 

The Government has said that it will provide an update of its thinking on these proposals as part of the Business Tax Roadmap to be published in March with the Budget.

Our submnission is available to view below in PDF format.

Technical Team

Downloads