The Chartered Institute of Taxation (CIOT) has called on the Government to delay changes to tax relief for corporate interest expense to help businesses adjust to the new regime smoothly and prevent the complexity having a negative impact on inward investment to the UK.
The Government is reviewing the rules on interest deductibility that apply within the UK in light of the best practice recommendations set out in an OECD report on Action 4 of the BEPS project.1 The CIOT told a government consultation2 that the mooted start date of April 2017 is too ambitious given the scale and complexity of the new regime. It said there is no need to rush in changes in this area because there are already a variety of rules which limit the tax deductibility of corporate interest expense, such as the Worldwide Debt Cap (WWDC) restrictions and the GAAR.3
A delay of two years would give the Government time to properly review the impact of this new regime on the UK’s competitiveness, and enable further and ongoing consultation on the detail of the legislation, allowing the policy to be translated into law accurately and effectively. That the OECD has not finished its work in this area is another reason to delay.
The CIOT believes a more usual and reasonable timetable for the introduction of such a structural change to the tax system would allow businesses time to understand and plan for the impact of the new regime on their business, and to point out any problems with the draft legislation so that it can be corrected before enactment.
Glyn Fullelove, Chair of CIOT’s Technical Committee, said:
“We recognise that the Government is looking to ensure that multinational companies should not be able to reduce UK tax liabilities by deducting disproportionate amounts of debt interest in the UK. However, given existing strong Exchequer protections, the Government should not be going so much faster and further than the rest of the world in introducing a measure such as this that potentially impacts on many commercial structures. The complexity of applying a formulaic rule makes it imperative that the rules are properly thought through and that the legislation is clear, that it operates smoothly, and does not seriously impact the UK’s competitiveness.
“The requirement for the UK to maintain a highly competitive tax regime which does not impose undue administrative burdens is arguably more important than ever given the uncertainty caused by the referendum decision to leave the EU. At the moment the country needs stability and measures that demonstrate that the UK is a competitive place to do business to encourage inward investment.
“We note the Government’s intention to be leading the way in implementing the BEPS recommendations and the CIOT has consistently been supportive of this approach in principle. However, a timetable to implementation of at least two years would not be detrimental to the Government’s overall support of the BEPS project as the UK would still be in the first wave of ‘early adopters’. This would also be in line with the timetable other OECD member countries are working to, particularly in the EU.”
The CIOT said the proposed UK regime does not take full advantage of the flexibility offered by OECD recommendations. In the UK, there is currently no intention for grandfathering provisions and the public benefit project exclusion is very narrowly drawn. This is a particular concern given the focus on using the private sector to provide long-term finance for public sector infrastructure.
Glyn Fullelove said:
“We would like to see the UK rules allow for grandfathering, either generally or for specific sectors which rely on long-term funding, carry forward/back allowances and the group ratio uplift that the OECD and EU recommend.”
Notes to editors
1. Summary of the OECD’s best practice recommendations on interest expense:
De minimis monetary threshold to remove low risk entities (optional)
Fixed ratio rule: allows an entity to deduct net interest expense up to a net interest/EBITDA ratio within a corridor of 10 per cent to 30 per cent
Group ratio rule: allows an entity to deduct net interest expense up to its group’s net interest/EBITDA ratio, where this is higher than the fixed ratio
(Option for a country to apply a different group ratio rule or no group ratio rule)
Rules to address volatility: Including carry forward of disallowed interest / unused interest capacity and/or carry back of disallowed interest (optional)
Public-benefit project exclusion (optional)
Targeted rules to support general interest limitation rules and address specific risks
Specific rules to address issues raised by the banking and insurance sectors
2. The CIOT’s submission can be read here.
3. Existing rules that limit the tax deductibility of corporate interest expense include:
- Several targeted anti-avoidance rules (TAARs)
- Transfer-pricing rules
- Worldwide Debt Cap restrictions
- B Anti-hybrid rules e.g. BEPS compliant rules
- General Anti-Abuse Rule
- DOTAS
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 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
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