Autumn Statement: Corporate Interest Restriction to apply equally to banking and insurance groups

The new rules restricting tax relief on interest will be introduced in April 2017, the Chancellor confirmed. The restriction will operate by way of a fixed ratio rule, which will limit corporate tax relief for interest 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.

Eloise Walker, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: "It is deeply disappointing to see that HMRC and the Treasury have ignored the valid concerns raised by the insurance and banking sectors and decided to plunge ahead with the rules, despite the absence of cogent guidance from the OECD on how the rules should apply to banking or insurance groups."

"It will be interesting to see how they propose the rules should apply. Could it actually make banking groups better off than others, as the banks in the group will have net interest profits to suck up extra interest expenses elsewhere in the group? I doubt it. Given HMRC and the Treasury's approach to these sectors at present I expect banks in particular to see the rules applied only in a disadvantageous way."

There is to be no change to the 30% limit, or the previously announced de minimis allowance of £2 million per annum, which will allow groups with net interest expenses below this level to fall outside the new rules.

The proposed 'public benefit project exclusion' (PBPE), which allows for a narrow exclusion for certain infrastructure projects that are in the "public benefit" will be widened, the chancellor has confirmed. The PBPE will enable groups to exclude the eligible tax-interest expense, as well as any tax-interest income and tax-EBITDA connected with suitable projects, from their interest restriction calculation. The details of any changes to the PBPE are unlikely to be published before the draft legislation to be included in Finance Bill 2017 is published on 5 December.

Walker said: "This is a small ray of hope for the infrastructure sector, who have been campaigning hard to head off the disastrous results which the 30% limit will otherwise impose on public infrastructure projects that are providing much needed schools and hospitals. But we have to wait and see how wide the widened exclusion will be, given that HMRC have previously thought themselves to be bound by the very restrictive formulation of the OECD."

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 rules 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. 

There have been calls for the UK's implementation of the interest deduction rules to be postponed in the light of the Brexit vote, so that the rules do not come into force in April 2017. Arguments for a delay intensified after the OECD published a discussion draft in the summer on how the group ratio rule should apply which suggested a more favourable treatment for joint ventures than that currently proposed by the UK government.

"It is worrying to see HMRC diving ahead with the new 30% restriction, when the economic effects of Brexit are so uncertain and Britain needs all the help it can get to encourage big business to come and stay here. It's all very well leading the way in combating BEPS, but other countries will be more than happy to stand by and watch the UK shoot itself," said Walker.

Proposed reforms to corporation tax loss relief will be introduced, the chancellor also confirmed in today's Autumn Statement. A restriction on the level of carried-forward losses that can be offset against a company's profits will apply from April 2017. Companies with profits in excess of £5 million will only be able to offset 50% of their profits using losses carried forward from a previous accounting period. At the same time there will also be increased flexibility in how losses can be used to reduce taxable profits, so that losses arising from April 2017 will be able to be carried forward and set against the taxable profits of group members and/or the taxable profits from different activities of a company.

Steps will be taken to address unintended consequences and simplify the administration of the new rules, the chancellor announced. The details of any changes to the proposed reforms are expected to be published with draft legislation on 5 December.

Walker said: "These measures are already causing problems for commercial deals, and they are not even law yet. The £5 billion cashpot to fund the chancellor's housing and R&D initiatives has to come from somewhere, but to tell companies they can't readily use losses created in the bad times can only further sour the relationship between big business and HMRC."

The government also confirmed its commitment to the Business Tax Roadmap that was published in March 2016 and sets out its plans for business taxes to 2020.

Heather Self, a tax expert at Pinsent Masons, said: "For once, it was good to have an Autumn Statement which did not announce a whole raft of new anti-avoidance measures. The chancellor confirmed his commitment to BEPS and to measures already announced, but refrained from excessive tinkering in this area.”