HRMC issued a consultation document in October 2015 on the deductibility of corporate interest expense. This was in response to the G20 and OECD Base Erosion and Profit Shifting​(BEPS) Project and invited views on how best to amend the UK interest rules. The consultation period closed on 14 January 2016 and the Government will now reflect on how to take forward the UK’s response.

Google in the news

The trigger for BEPS was the highly publicised tax positions of Starbucks, Google and other global operators, where they can legitimately plan around paying corporation tax in countries where they have significant business operations, the aim of BEPS being to modernise international tax rules, so as to ensure that global operators pay a fair amount of tax in the markets in which they operate. One of the OECD’s recommendations relates to interest deductibility. 

Currently some countries restrict interest deductible in the computation of profits subject to corporation tax and others do not. The UK currently restricts tax relief for interest where a tax paying company is within the UK’s transfer pricing rules and the requirement is for the tax deductible interest to be computed on an arm’s length basis. This approach takes no account of whether the income and assets supporting the interest are taxable in the UK, accordingly it is within the legislation for both inbound and outbound corporates to plan debt and interest on a global basis so as to minimise tax. 

Next steps

What the Government’s next steps will be in response to this consultation will be interesting. One professional body has responded to the consultation with a statement that it is unconvinced that such rewrite of UK rules is required; another response warns the Government that the UK could become a less attractive place to do business should there be radical changes to the existing rules. 

It will be important to monitor developments in this area and assess likely impact on your company’s tax position before any legislative changes are implemented. We remain hopeful for there to be no changes until after 1 April 2017 and for there to be a de minimis monetary interest threshold below which new rules won’t apply.