Spring Budget 2017—Finance

This analysis is part of the Lexis®PSL Tax team's summary of the Spring Budget 2017.   Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.

Tax deductibility of corporate interest expense

As announced at Budget 2016, and following several stages of consultation, new rules restricting the ability to obtain corporation tax deductions for interest and other finance amounts will come into effect from 1 April 2017.

The new rules will limit a group's deductions for net interest expense to 30% of tax-EBITDA in the UK (the fixed ratio rule), with an option for multinational groups to apply an alternative restriction based on the net interest expense to EBITDA ratio for the worldwide group (the group ratio rule). In both cases, deductions will also be capped to ensure that the net UK interest deduction does not exceed the total net interest expense of the worldwide group (the modified debt cap) and the existing debt cap legislation will be repealed. Only groups with net interest expense in the UK of more than £2m annually will have to apply the rules.

Draft legislation for the new rules was published in stages, on 5 December 2016 and 26 January 2017. In response to comments received, the government has now announced that several changes to the provisions will be reflected in FB 2017 in order to ensure that the rules do not give rise to unintended consequences or impose unnecessary compliance burdens. The government has announced that these changes will, in particular:

  • remove certain unintended restrictions that arise from the modified debt cap which could otherwise prevent deductions for carried forward interest expense
  • make the optional alternative rules for public infrastructure easier to apply—specifically, the changes will remove the requirement to compare the level of indebtedness of group companies qualifying for alternative treatment under those rules with that of group companies not so qualifying (eg those outside the UK), and in addition transitional rules will apply so that businesses will have time to restructure in order to qualify for these alternative rules
  • limit the scope of the provisions which treat interest on debt guaranteed by a related party as related party interest—these provisions will not apply in the case of certain performance guarantees or to any guarantees granted before 31 March 2017, nor will they apply to intra-group guarantees in the context of the group ratio rule
  • amend the definition of interest to include income and expenses from dealing in financial instruments as part of a banking trade, and
  • introduce new provisions for insurers regarding the calculation of interest on an amortised cost basis to provide a practical alternative to fair value accounting

For more information on the draft legislation published to date, see News Analyses: Draft Finance Bill 2017—corporate interest restriction, Draft Finance Bill 2017 clauses—further clauses on the corporate interest restriction and Draft Finance Bill 2017—new corporate interest restriction provisions.

See: OOTLAR (para 1.23).

Withholding tax on interest

At Spring Budget 2017, the government responded to the double taxation treaty passport (DTTP) scheme review consultation by confirming that it will renew and extend the DTTP scheme (see Practice Note: The double taxation treaty passport scheme (DTTP)), which simplifies access to reduced withholding tax rates on interest that are available in the UK's network of double tax treaties. With effect from 6 April 2017, the DTTP scheme should apply to 'all types of lenders and UK borrowers' and not be restricted (as it is prior to 6 April 2017) to corporate lenders and corporate UK borrowers. The government has confirmed that revised terms and conditions and guidance on the DTTP scheme will be published on GOV.UK on 6 April 2017.

The government also announced that it will introduce a withholding tax exemption for interest on debt traded on a Multilateral Trading Facility and that it will consult on this exemption in spring 2017. The Spring Budget 2017 states that this exemption will remove a barrier to the development of UK debt markets.

The OOTLAR also seems to confirm that draft FB 2017, clause 12 and schedule 4 will remain unchanged following consultation (see Practice Note: Exemptions and reliefs from UK withholding tax on yearly interest). This means that with effect for payments made on or after 6 April 2017, there will no longer be a requirement to deduct UK income tax at source from interest on peer-to-peer (P2P) lending (which broadly puts the interim non-statutory withholding tax exemption from P2P interest that has applied since 8 January 2016 on a statutory footing) or from interest distributions (ie dividends that are treated as yearly interest) from open-ended investment companies, authorised unit trusts or investment trust companies.

See: Spring Budget 2017 (para 3.14) and OOTLAR (paras 2.14, 2.37 and see also under the heading: 'Measures unchanged following consultation on the draft legislation').

Hybrid mismatch rules

As announced at AS 2016 and outlined in a technical note published on 5 December 2016, the government re-confirmed at Spring Budget 2017 that it will include legislation in FB 2017 to make two minor changes to the hybrid rules (see Practice Note: Hybrid and other mismatches and UK rules counteracting hybrid mismatch arrangements—table), both with effect from 1 January 2017:

See: OOTLAR (para 1.19) and TIIN: Corporation Tax: hybrid and other mismatches—permitted taxable periods of payees and deductions for amortisation.

Further reading

Further analysis on this Spring Budget:

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Filed Under: Budget

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