Tax deductibility of corporate interest expense - CIOT comments

By Technical Team on 03 Aug 2016

In our response to the second consultation on Tax deductibility of corporate interest expense, we have said that mooted start date of April 2017 is too ambitious given the scale and complexity of the new regime. We suggested that said there is no need to rush in changes in this area because there are already a variety of rules which limit the tax deductibility of corporate interest expense, such as the Worldwide Debt Cap (WWDC) restrictions and the GAAR.

The CIOT would like to see a more usual and reasonable timetable for the introduction of such a structural change to the tax system, which would allow businesses time to understand and plan for the impact of the new regime on their business, and to point out any problems with the draft legislation so that it can be corrected before enactment.  We suggested that a delay of two years (our response suggested a start date of 1 January 2019) would give the Government time to properly review the impact of this new regime on the UK’s competitiveness, and enable further and ongoing consultation on the detail of the legislation, allowing the policy to be translated into statute accurately and effectively. We also noted the ongoing work by the OECD in this area, saying that this is another reason to delay.

We pointed out that the requirement for the UK to maintain a highly competitive tax regime which does not impose undue administrative burdens is arguably more important than ever given the uncertainty caused by the referendum decision to leave the EU, saying that at the moment the country needs stability and measures that demonstrate that the UK is a competitive place to do business to encourage inward investment. 

We acknowledged the Government’s intention to be leading the way in implementing the BEPS recommendations but said that a timetable to implementation of at least two years would not be detrimental to the Government’s overall support of the BEPS project, as the UK would still be in the first wave of ‘early adopters’.  We pointed out that this would also be in line with the timetable other OECD member countries are working to, particularly in the EU.

We also pointed out that the proposed UK regime does not take full advantage of the flexibility offered by OECD recommendations. We said that we would like to see the UK rules allow for grandfathering, either generally or for specific sectors which rely on long-term funding, carry forward/back allowances and the group ratio uplift that the OECD and EU recommend.

Our response suggested that, rather than having a specific start date for all groups, it would be preferable for the new rules to take effect for accounting periods beginning on or after a specific date. This would prevent the need for many groups to have to deal with a ‘straddle period’ and remove some of the complexity from the proposals. We said that this would also fit better with the WWDC rules, which took effect for accounting periods beginning on or after 1 January 2010 and could then be turned off from the same date as the new rules apply.

With regard to the repeal of the WWDC rules we said that, notwithstanding that the OECD report on BEPS Action 4 did suggest that States might wish to have a debt cap type of rule, our view is that there is no need for any debt cap rules in addition to OECD recommendations. The minimal risk to the Exchequer does not justify the additional complexity. Consequently our recommendation was to repeal the existing WWDC rules without any modified replacement, saying this course of action has the benefit of simplicity.

However, we noted that the Government considers there would be risk to the Exchequer if some form of debt cap rule is not maintained.  Therefore, assuming there is to be some form of debt cap regime, we said that we are currently undecided whether the most sensible course of action would be to retain the existing WWDC rules in their entirety or for there to be a modified Debt Cap Rule as proposed. We said we would like to comment further on which course of action is preferable as the detail of the modified Debt Cap Rule is developed and it is known, for example, whether gateways will be included.  In the meantime our response set out some specific concerns regarding the proposed modified Debt Cap rule and some observations regarding the existence WWDC rules.

Our response also addressed many of the specific questions on the detail of the proposals posed by the consultation document.

Technical Team

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