Out-Law Analysis | 11 Jul 2016 | 2:56 pm | 2 min. read
This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.
The proposed restrictions, which are currently expected to apply from April 2017, would be bad for British business. It is to be hoped that HM Revenue & Customs (HMRC) will delay their introduction given the uncertainty which has arisen since the UK voted to leave the EU.
The UK government will come under pressure from industry experts to delay introducing the restriction. The plans are expected to have significant adverse consequences for infrastructure and energy projects that are heavily geared and whose viability is often reliant on tax relief for interest.
The restriction will operate by way of a fixed ratio rule, which will limit corporate tax relief for interest, other financing costs which are economically equivalent to interest and expenses incurred in connection with the raising of finance to 30% of "tax-EBITDA". Tax-EBITDA will be profits chargeable to corporation tax, excluding interest, tax depreciation such as capital allowances, tax amortisation, relief for losses brought forward or carried back and group relief claimed or surrendered. The restriction is being introduced following recommendations made by the Organisation for Economic Cooperation and Development in October 2015 as part of its BEPS (base erosion and profit shifting) project to combat international tax avoidance by multinationals.
The details of the new rules were published in a joint HM Treasury and HMRC consultation document in May. It is expected that requests to delay implementation will form a large part of stakeholders' responses, which are being accepted until 4 August.
There have already been calls to delay the commencement of the new rules. When the proposals were first consulted on in October last year, businesses urged the government to reconsider the timings. In the May consultation document, though, the government said that early introduction of the restriction would demonstrate the "UK's leadership in implementing the G20 and OECD recommendations".
However, the political and economic landscape has changed since October. Given the Leave vote for Brexit, perhaps there will be less political pressure on HMRC and HM Treasury from ministers to be seen to be leading the way in international tax policy – especially since the changes proposed will be so detrimental to offshore investment in British business at the very moment Britain will need all the advantages it can offer.
There is also concern that the new rules will render the so called public benefit project exclusion (PBPE) almost useless. The rules currently allow for a narrow exclusion for certain infrastructure projects that are in the "public benefit".
One of the conditions of the PBPE is that the project would have to "provide services which it is government policy to provide for the benefit of the public". Following Brexit and the expected downturn in economic activity, it is possible that reduced government funding will be available to finance infrastructure projects and therefore the government's infrastructure policy set out in the National Infrastructure Delivery Plan may change. This in turn may lead to even fewer infrastructure projects satisfying the PBPE.
The PBPE is so restrictive few existing projects will qualify. With a fall in government spending on infra projects likely, third party investment will be vital – but third parties will go elsewhere in Europe if the UK does not make it easy to obtain a good internal rate of return, by widening the PBPE to get such investments outside these rules.
Eloise Walker is a tax expert at Pinsent Masons, the law firm behind Out-Law.com.