On October 22, 2015 the UK Government opened an initial consultation on how to respond to the recommendations made the OECD Report on Action 4 of the BEPS Action plan. At that time the UK Government was interested in the views of all stakeholders on how to address BEPS issues involving interest expense in an effective and proportionate manner. Following this initial consultation on the OECD recommendations, Budget 2016 and the ‘Business tax roadmap’ set the key policy design features for a restriction on the tax deductibility of corporate interest expense. On May 12, 2016 the UK Government subsequently opened a consultation seeking stakeholder input on the detailed design and implementation of the new rules to inform the drafting of the legislation for Finance Bill 2017.
The deadline for responses is set at August 4, 2016 and responses have to be send via e-mail to: This email address is being protected from spambots. You need JavaScript enabled to view it..
Following the initial consultation, the UK Government announced at Budget 2016 that new rules for addressing BEPS through interest expenses will be introduced from April 1, 2017 in line with the OECD recommendations
The UK government intends to cap the amount of relief for interest to 30% of taxable earnings before interest, depreciation and amortisation (EBITDA) in the UK, or based on the net interest to EBITDA ratio for the worldwide group. The rules will include a de minimis threshold of £2 million net UK interest expense per annum and provisions for public benefit infrastructure.
These rules will apply to all amounts of interest, other financing costs which are economically equivalent to interest, and expenses incurred in connection with the raising of finance. References in this document to interest should be read to also include these other amounts.
In the Consultation Document it is stated that the UK government is continuing to review whether additional targeted rules are necessary to apply to particular situations in which deductions for interest would not be restricted under the rules now proposed but do give rise to BEPS. From the question raised in Paragraph 10 of the Consultation Document it seems that in this respect the UK Government might be considering additional targeted rules that are effective against:
· schemes that are designed to circumvent or exploit the definition of group or related person
· schemes that aim to artificially structure amounts to fall inside or outside of the definition of interest (for example, to reduce the amount of net interest expense that is subject to the restriction)
· schemes that involve the acquisition of other groups’ spare capacity or restricted interest amounts where that is a main purpose of the acquisition
· schemes that accelerate, or defer, income or profit as part of contrived arrangements that are designed to reduce the amount of any interest restriction
· schemes that look to inflate the group ratio of the group for any period
Attached to the Consultation Document are a.o. annexes containing:
· A summary of responses to the previous consultation
· A list of respondents to previous consultation
The subjects discussed in the Consultation Document include a.o.:
· Overview of the proposed interest restriction rules
o Scope of the rules
o Application to groups
o De minimis exclusion
o Fixed Ratio Rule
o Modified Debt Cap rule
o Group Ratio Rule
o Public Benefit Infrastructure
o Interaction with specific regimes
o Targeted rules
· Fixed Ratio Rule
o Definition of Group
o Periods of account
o Tax-interest
o Tax-EBITDA
o Carry forward of restricted interest
o Carry forward of spare capacity
o De minimis allowance
o Replacement of the current Debt Cap regime
· Group Ratio Rule
o Group ratio
o Obtaining financial information
o Definition of total group-interest
o Adjusted group-interest: Adjustments to amounts in profit or loss
o Qualifying group-interest: Restrictions on deductibility
o Related parties
o Definition of group-EBITDA
· Public benefit infrastructure
o Potential Public Benefit Project Exclusion
o Eligibility of a project
o Eligibility of interest expense for exclusion
o Potential grandfathering for existing loans or projects
· Interaction with specific regimes
o Oil and Gas
o Securitisation companies
o Authorised Investment Funds (AIFs) including Tax Elected Funds (TEFs)
o Investment Trust Companies
o Collective investment vehicles and the definition of group
o Real Estate
o Banking and insurance activities
o Tax incentive reliefs
o Northern Ireland rate of corporation tax
o Charities
o Registered Societies
o Controlled Foreign Companies (CFCs)
· Particular topics
o Tax exempt amounts and double taxation relief
o Derivatives
o Leasing
o Change of accounting policy
o Investment in non-group entities
o Public bodies
o Interaction with corporation tax carried forward loss reform
· Commencement
o Periods of account straddling 1 April 2017
o Pre-2017 interest expenses
Furthermore the Consultation Document contains an annex containing Group Ratio Rule Examples (Annex D)
Click here to be forwarded to the Consultation Document as published on May 12, 2016 on the website of the UK Government, which will open in a new window.
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