The UK is replacing the Worldwide Debt Cap with complex new corporate interest restriction rules.

The draft legislation effecting these changes was shelved from the Finance Bill earlier this year due to the General Election, but has now been reintroduced in a second Finance Bill and is effective from 1 April 2017. 

Complex new rules

These rules are extremely complex and companies have minimal time to address the issues or take steps to mitigate the impact either financially or administratively. All companies and groups with net interest expense above £2m should consider the impact of these rules as there may be a retrospective impact on the corporation tax payable. In particular, the impact for Quarterly Instalment Payments (QIPs) for corporation tax should be taken into account now for affected groups.

What is net interest expense?

“Net interest expense” refers to tax-interest expense amounts less tax-interest income amounts of the worldwide group. Broadly, the rules will limit a group’s UK tax deduction for its net interest expense to the lower of a % of the UK EBITDA (per the number for this measure used in the UK corporation tax return) and a measure of the net group interest expense per the group expense.  The default position is 30% and the computations of the various measures are prescriptive and complex, with various elections available. There are transitional rules that apply on 1 April 2017.

Corporate loss changes 

New legislation is to be effective from 1 April 2017 applying to the carry forward of corporate trading losses and some other types of loss.  The losses available to be carried forward are to be restricted by a “deduction allowance”.  Single companies and groups will be entitled to a £5m “deduction allowance” against which carried forward losses can be offset before a new restriction applies. The latter will apply to the whole group and a formula will determine the restriction. Whilst this legislative change restricts large losses carried forward, other legislative changes within the Finance Bill enable future carried forward trading losses to be utilised against multiple sources of income, compared to what previously applied. 

Who's affected?

The restrictions are likely to especially affect businesses that incur large uprfont costs prior to generating profits. 

Substantial Shareholding Exemption (SSE) changes 

We welcome changes to the SSE legislation, simplifying the rules from 1 April 2017 by removing the investing requirement.  The vendor company will no longer have to be a trading company or a member of a trading group.  Also from 1 April 2017 , the requirement for the company being disposed of to be trading immediately after the transaction is removed - except in two situations, being when the disposal is to a connected person or the disposal is part of an “arrangement” as defined in the legislation. 

We anticipate the Finance Bill No 2 2017 to be enacted this Autumn and are here to help you make sense of the new legislative rules. If your organisation is affected, contact us to find out how best to prepare.