The measure

Following the publication of draft legislation to limit the UK tax deductions that companies can claim for their interest expenses (as announced at Budget 2016), the government have announced a small number of changes which will be reflected in Finance Bill 2017 to avoid certain unintended consequences or impose unnecessary compliance burdens.

The changes will address:

  • Certain unintended restrictions arising from the operation of the modified debt cap which could prevent the use of carried forward interest capacity from loss-making years, or years with low EBITDA.
  • Changes to the treatment of guarantees from related parties, including the introduction of a rule grandfathering guarantees granted before 31 March 2017 so that interest on such loans will not be treated as related party. Certain performance guarantees and intra-group guarantees in the context of the group ratio will also be excluded from the rule treating interest on debt guaranteed by related parties as related party interest.
  • Public infrastructure exemption: the optional alternative rules will be amended so that they are easier to apply in practice – removing the need to compare the level of indebtedness of qualifying infrastructure companies with that of non-qualifying group companies, such as those outside the UK. Transitional rules will apply in the first year to enable businesses time to restructure, if necessary.
  • The definition of tax interest will be expanded to include both income and expenses from dealing in financial instruments as part of a banking trade
  • The introduction of special rules for insurers to enable them to calculate interest on an amortised cost basis, as a practical alternative to fair value accounting.

Who will be affected?

These amendments will be beneficial to a number of groups including:

  • those with losses in some years, including start-ups, which move into profit;
  • infrastructure groups;
  • groups with inter-company guarantees; " banks; and
  • insurers.

When?

The changes will be reflected in Finance Bill 2017, when it is released on 20 March 2017, and will come into force when the interest restriction legislation takes effect from 1 April 2017.

Our view

These issues became apparent on review of the draft legislation, released on 26 January 2017, and have been raised with HMRC and HM Treasury by a number of stakeholders.

Whilst these issues had been acknowledged by HMRC and HM Treasury, we welcome the government's formal announcement that these issues will be addressed. However, the precise drafting of these rules will need to be reviewed.

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