ICAS response: Tax deductibility of corporate interest expense
ICAS has responded to HMT and HMRC's consulation on detailed policy design and implementation for 'Tax deductibility of corporate interest expense'.
Read ICAS' response in full
- The result of the EU referendum means that UK companies are facing a period of uncertainty and will need to address a wide range of issues arising from the decision to leave the EU. This will occupy a considerable amount of business time and effort; therefore, the additional burden of introducing new interest deductibility rules should be delayed. We urge the Government to reconsider the start date for the proposed new rules on interest deductibility.
- As we noted in our response to the original consultation, 1 April 2017 is too soon to give companies the chance to review and adjust existing long term arrangements. This is more than ever the case following the EU decision, with the added complication that the period between now and April 2017 is likely to be a difficult period in which to undertake refinancing. This is the wrong time for businesses to have to renegotiate debt if the only reason for doing so is changes to the tax rules. The uncertainty may make businesses reconsider their UK presence if they feel it is becoming much more difficult to operate here.
- Time should be taken to assess the approach of other jurisdictions to ensure that, as far as possible, UK companies are not left at a competitive disadvantage. In this context it should be noted that the EU has set a deadline of 1 January 2024 for EU member states (which have targeted rules against BEPS relating to interest) to implement the OECD interest proposals; the date for EU member states without targeted rules is 2019. If the UK goes ahead with a 2017 implementation date this will therefore potentially be a long way ahead of other key jurisdictions and will disadvantage UK companies.
- There appears to be an underlying presumption in the consultation that equity finance is preferable to debt finance. This ignores the fact that loan finance is frequently used for legitimate commercial purposes where equity finance may not be possible. Provided the interest receipt is taxed at a rate similar to that applying to the interest cost (in the UK or abroad) it is hard to see that there is a BEPS issue with claiming a tax deduction for the interest paid. Loans and equity perform different functions; loans are a very useful mechanism for obtaining short term funding for a company. Equity is much harder to withdraw so may not be available or appropriate. It is difficult to see why the tax system should put barriers in the way of companies addressing their cash requirements. Depending on future arrangements with the EU we believe consideration should be given to disapplying the rules for UK to UK loans where there is no possibility of BEPS.
- Whilst the main OECD recommendations on Action 4 were published last year, its work was incomplete. Further discussion drafts on the Group Ratio Rule and Banking and Insurance Sectors have been published very recently so their recommendations have not been taken into account in drawing up the proposals in the consultation document. Proper consideration needs to be given to this additional OECD work; this will not be possible with the suggested 2017 implementation date.
- Many large companies have just carried out a costly and time consuming process to configure business reporting systems to provide data for country by country reporting (CBCR). Calculating interest deductibility for the UK group as proposed in the consultation document would require another configuration. Most IFRS accounting reporting methods consolidate the whole group, not just the UK. To reconfigure this, all UK entities would have to be carved out and consolidation adjustments attributed to them as appropriate. This is another time consuming systems change as the data needed differs from CBCR. The implementation date should not be before 2019.
- The new regime should include grandfathering provisions for existing financing arrangements. This will be particularly important if the Government decides that it is essential to proceed now, so that companies are forced to restructure financing in the present uncertain financial climate and without knowing the approach which will be adopted by other jurisdictions. Grandfathering will give companies time to adjust and allow any refinancing to be undertaken over a longer period, thus mitigating some of the short term difficulties arising from the decision to leave the EU. Again it should be noted that the EU implementation proposals do include provision for grandfathering – so once again UK companies will be disadvantaged if the UK proposals are not amended in this respect.
- The inclusion of a £2 million de minimis allowance is welcome. It is helpful that 95% of groups (and standalone companies) will easily be able to see that they are unaffected by the rules. We suggest however that consideration should be given to allowing periodic reviews of this threshold or some form of indexed increase to take account of changes in interest rates and erosion of the threshold over time.