Tax deductibility of corporate interest expense | KPMG | UK
Share with your friends

Tax deductibility of corporate interest expense – updated draft legislation

Tax deductibility of corporate interest expense

The much anticipated update to the draft legislation on the new corporate interest restriction has been published for comments.

  • Daniel Head

    KPMG in the UK

Also on

On 26 January, the Government published updated draft legislation on the new corporate interest restriction rules which will take effect from 1 April 2017. This new draft legislation supersedes the draft legislation originally published on 5 December 2016 as part of the draft Finance Bill 2017 clauses, and contains information on the remaining elements of the rules. 

The update extends the draft legislation to a total of 132 pages and includes the draft legislation for the following key aspects of the new regime: 

  • Definitions needed for the calculation of the optional Group Ratio Rule. This includes details of optional elections that can be made to more closely align the calculation of ‘Group EBITDA’ with UK tax principles;
  • Rules defining ‘related parties’; 
  • Final detail of the optional rules that qualifying companies investing in public infrastructure may choose to apply on an elective basis – the Public Benefit Infrastructure Exemption (PBIE);
  • Detailed rules applying to particular issues and industries, such as REITs, companies operating in the oil and gas ring fence, leasing companies, and companies using Patent Box and other tax incentives; and 
  • Optional ‘blended’ group ratio rules for groups with one or more related party investors.

Our team is working through the significant amount of detail set out in the draft legislation. However, initial observations are that certain policy changes have been made in response to comments received on the initial draft that was issued in December. These include: 

  • Amendments to the Public Infrastructure rules – the key change being that this now requires a ‘prospective’ election that has effect for a minimum of five years;
  • Inclusion of creative tax reliefs into the list of tax reliefs to be disregarded in calculating tax-EBITDA. Previously this had been limited to R&D reliefs only;
  • Confirmation that there will be no rules to specify how any restriction to interest expense should be allocated to profits that are subject to the Northern Ireland CT rate; and
  • The disapplication of the regime-wide anti-avoidance rule to certain ‘commercial restructuring arrangements’.

In addition, the Government has clarified that if a group has aggregate net tax-interest income for a period, that amount may then be added to the interest allowance for that period. This will allow the carried forward interest amounts that can potentially be deducted in subsequent periods to be increased by the amount of net tax-interest income. 

Consequential amendments to regulations for Authorised Investment Funds, Investment Trust and Securitisation Companies will be published separately in draft for comment.

The Government has requested that any outstanding comments on the original material published on 5 December 2016 (where still relevant) should be provided by the original deadline of 1 February. Any comments on the new draft legislation should be provided by 23 February. 


For further information please contact :

John Monds

Daniel Head

Connect with us


Request for proposal