The government has published draft legislation for the new corporate interest restriction which will be effective from 1 April 2017.
A new 'fixed ratio' rule will limit tax deductions for interest expense and similar financing costs to 30% of 'tax-EBITDA'. This refers to 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. A 'group ratio' rule, based on the net interest expense to EBITDA ratio for the worldwide group, may be substituted for the 30% figure. Corporate groups with net interest expenses below a 'de minimis' allowance of £2 million per annum will be exempt from the new rules.
Industry groups had called for a delay to the legislation, in light of uncertainty over Brexit. Banking and insurance groups in particular had argued that the regulatory requirements on the sector already provide adequate protection against excessive leverage for tax purposes. Most respondents to a consultation on the rules published in May 2016 had suggested that banking and insurance groups should be excluded from the rules, as the government acknowledged in its response document published yesterday. However, it said that it "does not think a full exclusion from the rules is justified" and banking and insurance groups will be subject to the fixed ratio rule in the same way as other industry groups.
Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-law.com, said: "It was clear from the industry responses that a 'one size fits all' approach to the fixed and group ratio rules would have the potential to become a 'one size fits no-one' regime for the bank and insurance sectors. The logical approach to such disparate concerns would have been to either exclude banks and insurance companies from the rules altogether and be done with it, or to wait until the new regime had bedded in for others sectors before tackling the very practical problems of applying the regime to the financial sector. HMRC has done neither. Instead it is adamant in its desire to forge ahead and apply the new regime across the board, to financial and non-financial groups alike, giving no reason other than that they do not consider full exclusion from the rules to be 'justified'."
The response document said that the government "will monitor whether there is a need to amend the rules" relating to possible risks arising from mixed groups that combine non-financial services businesses with a regulated bank or insurer.
"A feeling of deja vu overtakes me when HMRC says it will 'monitor' the new rules and tinker with them later to deal with any problems arising from mixed groups of financial and non-financial businesses," said Walker.
"They did exactly the same thing with the original worldwide debt cap: rushed the drafting through without proper consultation, and spent the next six or so years fixing all the problems they created. Here we go again, only this time it’s not just the worldwide debt cap rule itself that is being revamped. It’s a fixed ratio rule, a group ratio rule, a worldwide debt cap rule, an exclusion for public benefit infrastructure, grandfathering rules and another slew of targeted anti avoidance rules doubtless to come. Expect a period of turmoil for all industries, but especially banking and insurance, while all this beds down over the next five years or so. And expect overseas banks and insurance groups to try to limit their exposure by booking business elsewhere to the extent they can," she said.