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18.05.2016 02:49 Age: 2 days

UK Interest Deductibility Rules Could Increase Business Burdens


Professional services firm KPMG has warned that the UK's proposed new rules on the tax deductibility of corporate interest expense could increase businesses' financial and administrative burdens.

The proposals form the Government's response to Action 4 of the Organisation for Economic Cooperation and Development's (OECD's) base erosion and profit shifting (BEPS) project. From April 1, 2017, the Government will cap the amount of relief for interest to 30 percent of taxable earnings before interest, depreciation, and amortization (EBITDA) in the UK. It will also introduce a group ratio rule, based on a net interest-to-EBITDA ratio for a worldwide group.

The rules will include a de minimis threshold of GBP2m (USD2.88m) net UK interest expense per year. The aim is to ensure that the rules are targeted where the greatest risk lies. The rules will apply to all amounts of interest, other financial costs that are economically equivalent to interest, and expenses incurred in connection with the raising of finance.

The Government is currently running a consultation on the proposals. A previous consultation was launched in October 2015.

According to Daniel Head, Tax Partner at KPMG, at 92 pages and with 46 separate questions, the latest consultation document contains a significant amount of detail, suggesting that the final rules will be complex.

"As such, UK businesses will face a substantial impact as a result of these proposals with an additional financial and a significantly increased administrative burden once the rules are implemented," he said.

Head added that the scope of the consultation "suggests that there is still a significant amount of detail to work through in order to ensure the rules are effective and achieve the desired purpose." He questioned whether, with so much to cover, the proposed start date of April 2017 is realistic.

Head said: "One of the aims of the BEPS project was to try and simplify the rules in relation to the tax deductibility of interest. Yet, the detailed proposals contained in this second consultation suggest that the new UK rules will actually be far more complex. Added to this, HM Treasury (HMT) has confirmed that the new rules will apply after the application of existing UK rules in this area, which complicates these rules even further."

"What's also clear from the document is that there has been a 'mixed bag' in terms of HMT's consideration of representations made in the previous consultation published in October 2015. While some concerns have been addressed - such as the exclusion of foreign exchange movements from the definition of interest - there are other major areas where there appears to have been little compromise reached."

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UK Interest Deductibility Rules Could Increase Business Burdens