Out-Law News 1 min. read

Companies should oppose income tax interest changes before 22 June deadline, says expert


Planned changes to rules on interest on income tax could damage the ability of UK companies to compete against those in other countries, a tax law expert has warned. Companies have until next Friday to challenge the plans. 

Her Majesty's Revenue and Customs (HMRC) has published a consultation on proposed changes to income tax rules on interest. The consultation closes on 22 June.

Tax law expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that companies should resist the changes.

"I think that the proposals could damage UK competitiveness, and urge HMRC to think again," she said.

Self said that the consultation proposes changes in three areas which companies should oppose. These areas are in relation to short interest, quoted Eurobonds and funding bonds.

"The proposal is that the difference between 'short' and 'annual' interest should be abolished.  This would mean that formal clearance applications would have to be submitted in order to make any payment of interest to an overseas entity.  This would apply to all balances, such as intra-group current accounts or cash pooling arrangements," she said.

"Even though most UK treaties allow interest to be paid gross, the compliance obligations would be significant.  In some cases, withholding tax could be imposed and there could be tax leakage within the group," said Self. "We think that the proposal will impose significant compliance burdens, and will make the UK an unattractive location for group Treasury functions."

HMRC has proposed restricting an exemption relating to the use of Eurobonds within groups of companies because of a concern that they are being used to avoid the requirement to deduct tax at source.

"One of the main attractions of the quoted Eurobond exemption is its simplicity and certainty.  The imposition of conditions is likely to damage the attractiveness of the UK as a financial centre," said Self.

A proposal that the tax deducted from interest on funding bonds should be paid in cash, rather than being capable of being settled by a further issue of bonds, would be impractical where funding bonds have been used in situations where the debtor does not have cash available, said Self. 

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