The UK implements new limitation on tax deductions for interest

The UK’s draft Finance Bill 2017 was published in early December 2016. It contains detailed draft legislation to introduce a new limitation on the deductibility of interest costs from corporate profits.

The rules will take effect for amounts accruing after 1 April 2017. They limit a UK group’s ability to deduct interest from taxable profit to the lower of:

  • a defined percentage of taxable EBITDA (i.e. Earnings Before Interest, Taxation, Depreciation and Amortisation).  This will be either 30% or a percentage based on the group’s worldwide interest/EBITDA ratio; and
  • The worldwide consolidated net interest expense of the group.

There is limited flexibility to carry forward disallowed interest (or excess capacity) for relief in other periods.

For many companies this will significantly restrict the offset of interest expense against taxable profits.  In many cases, there will be additional cash tax payable, and this cost will effectively increase the cost of capital.  Some groups may be able to mitigate the impact by reorganisation of their activities, and by the use of the carry forward rules.

There are special rules for companies engaged in “public benefit infrastructure” projects, Real Estate Investment Trusts, and charities.

Companies operating in the UK should consider the effect of these rules as a matter of urgency, given the limited time before they come into effect.

Even if there is no permanent disallowance of interest expense, many groups will have to deal with timing differences caused by fluctuations in taxable EBITDA, interest expense, and other variables.  It will be important to establish whether the carry-forward mechanisms will give effective relief in future years.  This is particularly critical where groups have losses, as new restrictions on the use of historic losses against current profits may mean that some groups are paying cash tax much sooner than they expect.

For out more information on evaluating these rules and the impact they could have for you, click here .

Graham Robinson
Partner, International Tax and Treasury

[email protected]
+44 (0) 20 7804 3266