Experts urge delay to new rules that may disadvantage UK businesses

The Chartered Institute of Taxation (CIOT) has told the Government that it is unconvinced that proposed new rules, which will restrict interest expenses that can be deducted when a company calculates its taxable profit, are necessary in the UK.

The CIOT said that concerns around the use of interest expense being used to shift profits to other countries by multinational companies, which led to this aspect of the Base Erosion and Profit Shifting (BEPS)1 Action Plan, are either relatively unimportant for the UK or have been addressed by other aspects of the BEPS Action Plan and/or existing UK tax rules.

The Institute is calling for a delay beyond the earliest proposed implementation date of April 2017  to ensure all issues and complexities are properly addressed and the new rules do not disadvantage UK businesses.

Glyn Fullelove, Chairman of CIOT’s International Taxes Sub-Committee, said:

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“While we recognise the need to tackle this issue globally, we are unconvinced of the practical need to introduce a structural interest restriction here in the UK.

“The UK is not a high tax country, so the risk of groups placing higher levels of third party debt in the UK is no longer the threat it was when the UK’s rate of corporation tax was close to or above 30 per cent. This risk will be reduced further when the rules to counteract hybrids and other mismatches take effect2.

“In addition the UK has only relatively recently introduced the world-wide debt cap which addresses the same issues, so it is questionable whether it is appropriate to now introduce new rules to cover the same ground in a different manner.”

Despite its reservations, the CIOT acknowledges that the UK Government is likely  to introduce a structural interest restriction in the UK along the lines of that proposed by the OECD.  The Institute recognises that there is merit in having rules which are consistent with those which are introduced by other countries, but this will only be the case if other countries do also implement similar rules.

Glyn Fullelove said:

“We strongly urge the Government to delay any implementation of a structural interest regime to ensure it reflects proper consideration of all the issues and many complexities. In particular, UK businesses should not face restrictions on interest deductibility which are significantly harsher than those in other competing economies, particularly where third party interest expense is concerned. 

“The aim must be to arrive at a regime which best achieves the stated policy objectives of tackling BEPS involving interest expense while maintaining the competitiveness of the UK tax system.  The UK’s existing rules mean the UK can, and should, take the time necessary to ensure that this significant change to the UK corporate tax system achieves its objectives without disadvantaging UK businesses.

“We do not believe that this can be done in a timeframe bringing legislation into effect by April 2017; realistically, a longer time period is required to design a new regime of this complexity, which takes into account what happens outside the UK.”

The CIOT has made a number of recommendations in response to a government consultation on the design of a structural interest restriction in the UK3, if it goes ahead. These include:

• Interest on third party debt should not be restricted by the regime without good reason, and so far the CIOT has not heard any such reason why this would be the case in the UK.
• The regime should be a replacement for world-wide debt cap, and some other interest restrictions (such as those which rely on ‘main purpose’ tests which cause such difficulty in practice, because of the vagueness of these tests).
• The regime should exclude companies which pose little risk of BEPS, such as those which are purely domestic (the CIOT recognises that this may require action at EU level), SMEs and those with a de minimis level of interest expense.  The de minimis level and thresholds should be set as high as reasonably possible, and the fixed ratio should be 30 per cent.
• There should be sufficient rules to address concerns about volatility of profits (such as averaging over a business cycle), and giving groups the freedom to allocate denied interest expense to other group companies which are less leveraged and have the capacity to use it. Similarly, carry forward (and, possibly, a limited carry back facility) should be made available.
• The group ratio rule must be a feature of the regime, to address some of the concerns of the harsh way in which the fixed ratio would otherwise operate.

Notes for editors

1. BEPS seeks to tackle tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. For more information visit http://www.oecd.org/ctp/beps.htm

2. Draft legislation to tackle hybrids and other mismatches has been published and is expected to be included in this year’s Finance Act.

3. To view CIOT’s recommendations in full, see section two of its submission – here.

4. The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.