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To prevent large businesses from using interest expense to erode the tax base, the government is introducing rules to limit the tax deductions that large businesses can claim for their interest expense in the UK. The new rules will be consistent with the OECD’s best practice recommendations set out under Action 4 of the Base Erosion and Profit Shifting (BEPS) project.
Some of the proposed rules include:
• Fixed Ratio Rule, limiting corporate tax deductions for net interest expense to 30% of a group’s UK EBITDA,
• Group Ratio Rule, based on the external net interest to EBITDA ratio for the worldwide group (which will replace the current worldwide debt cap regime with a more limited net interest cap).
• De minimis group threshold of £2 million net UK interest expense.
In the Autumn statement, the Chancellor confirmed that these rules will be in effect from April 2017. Last Monday, the draft provisions for Finance Bill 2017 were published on GOV.UK, including those to implement the Corporate Interest Restriction (schedule 7, section 21, page 176), as well as HMRC’s responses to comments raised during the consultation period up to 4 August 2016.
This draft legislation includes:
• Core provisions of the restriction, such as the Fixed Ratio Rule and the Modified Debt Cap.
• Framework for the Group Ratio Rule and the mechanism for allocating any restriction to individual companies and accounting periods.
• Provisions to carry forward restricted interest and surplus capacity, which deal with companies leaving and joining groups.
• Commencement, transitional and anti-avoidance rules.
HMRC will publish the remaining provisions by the end of January in an updated version of the draft legislation. These will include:
• Definitions needed for the Group Ratio Rule, including how it will apply to joint ventures.
• Rules concerning related parties.
• Public Benefit Infrastructure Exemption.
• Rules for particular issues and industries such as the Patent Box and other tax incentives, leasing, REITs and securitisations.
One point worth mentioning is that HMRC has decided to allow Groups to have the option to exclude the fair value movements on derivatives from the scope of the rules (in a similar way to the application of the Disregard Regulations), at the same time as excluding them altogether from the calculation of the Group Ratio. HMRC is welcoming comments on the published material up to 1 February 2017.
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