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Out-Law News 2 min. read

Corporate interest restriction cut from pre-election UK Finance Bill

The legislation to introduce restrictions on corporation tax deductions for interest payments will not be included in the UK Finance Bill that will become law before the general election. The government tabled amendments to the bill withdrawing most of its provisions before it went through the remaining House of Commons stages on 25 April.

Other provisions which have been dropped include reforms to corporation tax loss relief and reforms to the substantial shareholding exemption. Along with the corporate interest restriction these provisions were all due to have effect from 1 April 2017. The provisions had temporary statutory effect by virtue of Budget Resolutions, but this will cease as they will not become law before parliament is dissolved on 3 May.

The corporate interest provisions were due to introduce a new 'fixed ratio' rule from 1 April 2017 to limit the tax relief available for companies in respect of interest payments. Tax relief for interest would be limited to 30% of profits chargeable to corporation tax, excluding interest, capital allowances, tax amortisation and relief for losses. There would be a de minimis allowance for groups of £2 million a year. An alternative group ratio rule based on the net interest to EBITDA ratio for the worldwide group would help groups with high external gearing for genuine commercial purposes.

Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-law.com, said: “We’ve been saying for ages that the government should not be rushing through the corporate interest restriction provisions because the new rules are very complex and will have wide ranging effects for corporate groups, impacting on structures which are highly geared for entirely commercial reasons. It is therefore good news that they have been removed from the pre-election Finance Bill. In theory, at least, this also gives more time for some of the more egregious drafting mistakes in the legislation to be corrected before the new rules become law."

"What is not such good news is the uncertainty this causes for companies, who won’t know exactly how they will be taxed in their current accounting period. We assume that if the Conservatives get back into power the provisions will simply be included in a second Finance Bill and will be properly considered at committee stage. What we don’t know is whether they will still come into force on 1 April, and whether any substantive amendments will be made before enactment,” she said.

Last week the Chartered Institute of Taxation (CIOT) wrote to chancellor Philip Hammond urging him not to rush through a large number of tax changes in the Finance Bill without any real parliamentary scrutiny. The legislation relating to the corporate interest restriction took up 156 pages of the 762 pages of the bill which, before much of it was withdrawn, was believed to be one of the longest on record.

The corporation tax loss reforms, which were also removed from the Finance Bill, were designed to increase flexibility in how carried forward losses can be used, including by way of group relief. However, the reforms also mean that companies with profits in excess of £5m will suffer loss restrictions and will only be able to offset 50% of their profits against losses carried forward in a single year.

The substantial shareholdings exemption (SSE) changes which were previously included in the Finance Bill were designed to remove requirements that made it difficult for the exemption to be claimed, including the requirement for the selling company to be a trading company or member of a trading group. They also make the exemption available for some institutional investors on the disposal of underlying non-trading companies.

Like the interest restrictions it is expected that the corporate loss and SSE provisions will be contained in a post election Finance Bill.

The Criminal Finance Bill which introduces new criminal offences of failing to prevent the facilitation of tax evasion, is expected to receive Royal assent this week. 

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