Draft Finance Bill 2017: Corporate Interest Restriction

Draft Finance Bill 2017: Corporate Interest Restriction

Draft Finance Bill 2017 provides some welcomed (but not full) clarity in relation to the new UK interest deductibility rules.

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Who should read this?

Relevant to all UK companies that have interest or interest like expenses on which they claim relief for UK tax purposes.

Summary of proposal

Following the public consultation that took place over the summer of 2016, draft legislation has now been issued that sets out the proposed new rules in relation to the restriction of corporate interest for UK tax purposes.

The draft legislation and HMT/HMRC consultation response document confirms that the key elements of the rules will be in keeping with those set out in the original public consultation document:

  • 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.);
  • The Fixed Ratio Rule (FRR) will limit a group’s UK tax deductions for net tax interest expense to 30% of its tax EBITDA (earnings before interest, tax, depreciation and amortisation);
  • A group may apply the Group Ratio Rule (GRR) if this results in a better position. The GRR will be calculated with reference to accounting EBITDA but then applied to UK 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;
  • There will be a modified ‘debt cap’ rule (MDCR) 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This rule will now apply from 1 April 2017 and is designed to replace the World Wide Debt Cap legislation which will be repealed from that date;
  • There will be provisions to allow the carry forward of excess tax interest (indefinitely) and excess capacity (for five years); and
  • There will be a Public Benefit Infrastructure Exemption (PBIE) that will apply to certain businesses and will remove qualifying interest from the new rules. The definition of Public Benefit will be drawn much wider than originally suggested in the consultation and will include a limited scope grandfathering provision.

The draft legislation also sets out more detail in relation to how the rules will be implemented. Briefly this is as follows:

  • A group must appoint a UK entity to be the ‘Reporting Company’ for the group. HMRC must be notified of the appointment in the six months immediately following the end of the relevant period of account;
  • The Reporting Company must then submit an ‘Interest Restriction Return’ to HMRC within 12 months of the end of the relevant period of account; and
  • The Interest Restriction Return must include a prescribed list of information for each UK company that is covered by the return and set out the specific details of the interest restriction arising in the period (including a detailed statement of calculations), how this has been allocated between the UK companies and how any carried forward interest or capacity is allocated.

This confirms that the administrative and compliance process for applying the new rules is likely to be particularly onerous for UK Groups and adds another layer of complexity to the already comprehensive legislation in this area.

The draft legislation is not yet complete and HMRC/HMT have indicated that further updates will be issued in January 2017. These will complete the draft legislation and cover the following:

  • Definitions needed for the GRR;
  • PBIE and the interaction with related parties;
  • Interaction with the Patent Box and other tax incentives; and
  • Application to specific industries such as Banking and Insurance, Leasing, Real Estate Investment Trusts and Securitisations.

Key Changes since previous proposals

Key changes in the draft legislation to those in the original consultation proposals are as follows:

  • Alignment of the commencement date for the FRR, GRR and MDCR rules to 1 April 2017. Previously the MDCR only applied to accounting periods beginning ‘on or after’ 1 April 2017;
  • Excess capacity will be available to carry forward for five years (original proposal was three years only);
  • Confirmation that the amount of interest that can be deductible under the GRR is capped at 100% of Tax EBITDA;
  • A narrowing of the definition of related party to exclude debt where at least 50% of a specific class of debt is held by an unrelated party;
  • A number of changes to proposed definitions in order to better align Tax and Accounting measures. These include but are not restricted to:
    • Optional election to exclude fair value (FV) movements on derivatives from the definition of Tax EBITDA (to operate in a similar way to the disregard regulations).
    • Optional election to apply various adjustments to Group EBITDA to more closely align this with Tax EBITDA for the purposes of the GRR.
    • Changes to the definition of Group Interest for the purposes of the GRR;
  • A widening of the PBIE to cover a broader range of qualifying companies and to incorporate a limited application grandfathering period for related party debt entered into by qualifying companies pre 12 May 2016. These changes are particularly welcome; and
  • Oil and Gas sector - confirmation that ring fence activities will be excluded from the rules in full.

Timing

With effect from 1 April 2017.

Where a Group has a period of account that spans this date it will need to consider two separate periods for the purposes of preparing the relevant calculations. Allocations between periods should be made on a just and reasonable basis.

Our view

Overall, the draft proposals are in keeping with the original consultation document. However, there have been some welcome amendments made to certain areas of the proposals as a result of the responses made to the consultation.

The most significant development is the release of the rules around reporting and completion of a new ‘interest restriction return’ which will add a significant compliance burden for business.

The draft legislation is still not complete, with further additions to be released in January, so as always, the devil will be in the detail and the picture will become much clearer once the legislation is issued in full.

Contacts

John Monds

T: +44 (0)16 1246 4761

E: john.monds@kpmg.co.uk

Daniel Head

T: +44 (0)16 1246 4742

E: daniel.head@kpmg.co.uk

Finance Bill 2017 Draft Clauses

Finance Bill 2017 Draft Clauses

KPMG’s Commentary provides an overview of the draft clauses and insight into the measures both those of general interest and for specific groups.

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