Consultation: Tax deductibility of corporate | KPMG | UK

Consultation: Tax deductibility of corporate interest expense

Consultation: Tax deductibility of corporate

A second consultation, on the detailed policy design and implementation of the new rules, has now been published.


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On 12 May 2016, a second consultation document on the UK’s implementation of the OECD’s recommendations under BEPS Action 4 was published. The Government has already announced that new rules on interest deductibility will be introduced from April 2017 in line with the recommendations set out in the OECD report and an initial consultation document was published in October 2015. The key policy design features for a restriction on the tax deductibility of corporate interest expense were included in the Business Tax Roadmap published alongside Budget 2016. This latest consultation seeks stakeholder input on the detailed design of the new rules to inform the drafting of the legislation for Finance Bill 2017.

The 92 page consultation document sets out further detail on the proposed design of the new rules together with 46 specific questions on which HM Treasury is seeking the views of stakeholders.

Our initial thoughts are that there is a lot of detail to digest and the final rules will be complex in their operation.

There has also been a ‘mixed bag’ in terms of addressing the key concerns of stakeholders that were raised in response to the initial consultation. Some areas appear to have been acknowledged (e.g. exclusion of foreign exchange movements from the definition of interest) whereas others have not been reflected in the detailed proposals. For example the proposed Public Benefit Project Exemption (PBPE) appears to be very narrow in application and does not extend to cover related party interest. As a result this is likely to have limited additional benefit to a key sector for inward investment into the UK.

Overall, it is clear that UK business will face a real (and significant) impact as a result of these proposals with both an additional financial and administrative burden.

Stakeholders have until 4 August to digest the content, understand its implications and submit responses. We will release further commentary as we work through the detail of the document. Please follow our BEPS Action 4 Tax Diary for updates during the consultation period.


  • ‘Fixed Ratio Rule’ will limit a group’s UK tax deductions for net tax interest expense to 30 percent of its tax EBITDA;
  • The group may apply the ‘Group Ratio Rule’, if this results in a better position. The Group Ratio Rule will be calculated with reference to accounting EBITDA but then applied to a tax EBITDA;
  • There will be a de minimis allowance of £2 million per annum which means that groups with net tax interest expense below this will be unaffected by the rules;
  • Groups that are not excluded by the de-minimis rule will also be able to deduct net tax interest expense of at least £2 million per annum. This appears to be a welcome change from the initial communications and removes the ‘cliff edge’ effect of the de-minimis rule;
  • There will be a modified ‘debt cap’ rule included that will cap the amount of net tax interest expense deductible under the new rules at the global net adjusted interest expense of the group. This rule is designed to replace an element of the World Wide Debt Cap legislation that will be repealed, however it would appear to be even more restrictive;
  • Proposed definitions for each of the elements of the ratio tests (Group, EBITDA, net tax interest etc.) are set out in the document and comments are invited. We note that the definition of net tax interest includes profits and losses from derivatives which are taken out in relation to interest risk but excludes foreign exchange movements;
  • Confirmation that the rules will apply to net tax interest expense after the application of all other UK legislation that may restrict interest relief (i.e. transfer pricing (the arm’s length provision), unallowable purpose etc.)
  • There will be provisions to allow the carry forward of excess tax interest (indefinitely) and excess capacity (for three years);
  • UK groups will generally be free to allocate any restriction between UK entities as they wish;
  • For Groups with an accounting period that straddles the 1 April 2017 implementation date the application of the rules in the first period will be complex; and
  • Specific consideration is required for certain industries (oil & gas, Financial Sector and banking, securitisation companies, charities, certain property investment vehicles e.g. REITs).

For further information please contact :

Daniel Head 

John Monds 

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