On 21 July 2020 the UK published draft legislation to amend the limitation on the interest deduction for corporation tax. This would be part of the Finance Bill for 2020/21.
The rules to limit the corporation tax deduction for interest were enacted in the Finance Act (No 2) 2017 and took effect for periods beginning on or after 1 April 2017. The restriction applies where a group with net interest expense exceeding GBP 2 million per year in the UK has net interest expense exceeding 30% of the UK EBITDA (earnings before interest, tax, depreciation and amortization). This is then subject to a further test based on whether the net interest to earnings ratio of the group in the UK exceeds the same ratio for the worldwide group.
The technical amendments aim to ensure that the interest limitation rules apply as intended. The first amendment clarifies the application of the provisions to a Real Estate Investment Trust, to ensure that the UK property business of a non-resident company is charged to UK corporation tax instead of income tax.
The other amendment to the provisions ensures that penalties would not arise in the case of late filing of an Interest Restriction Return where there is a reasonable excuse. This amendment aligns the rules with the general rules for corporation tax self-assessment.
