UK 2016 Autumn Statement – corporate interest expense restrictions

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In his Autumn Statement Chancellor Philip Hammond confirmed the implementation of the UK’s new restriction on tax relief for corporate interest expense. Most of the draft legislation has been published (here), with the remainder coming this month. The new interest restriction measures will apply from 01.04.2017.

The new rules are intended to ensure that businesses won’t be able to avoid UK tax by borrowing excessively in the UK to finance activities elsewhere.

Broadly, the proposals are unchanged from the consultation document released in 2016, but there is more detail on what will be included in EBITDA and the carry forward of unused capacity has been extended from 3 to 5 years.

The restrictions on the tax deductibility of corporate interest expense are based on BEPS Action 4 and apply a fixed ratio rule that limits deductions for net interest expense to 30% of a group’s UK EBITDA.

There is no avoidance or purpose condition for the rules to apply, but they apply after most other tax rules, including transfer pricing and anti-hybrid, so the arm’s length principle takes precedence.

The Group Ratio Rule and the Public Benefit Infrastructure Exclusion will allow a deduction of a greater amount of interest in appropriate circumstances and there are rules to deal with timing differences between interest expense and EBITDA.

Restricted interest is carried forward indefinitely and must be deducted in a later period if there’s sufficient interest allowance. Unused interest allowance can be carried forward for up to five years.

Businesses may submit comments to by 1 February 2017 and there is likely to be a further opportunity to comment on the legislation coming out this month.


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