On 16 November 2017, the new corporate interest restriction rules were enacted in Finance (No.2) Act 2017 that received Royal Assent to impose an additional potential restriction on UK tax relief for finance costs, after the existing tax rules (including the transfer pricing rules) have been applied.
On 4 August 2017, HMRC issued for public consultation updated draft guidance in relation to the corporate interest restriction rules to be included in the Finance Bill (No 2) 2017. The latest draft guidance amends and updates the initial draft guidance that was issued on 31 March 2017 and takes into account technical changes made and included in amended clauses published on 13 July 2017.
The corporate interest restriction generally follows the recommendations of the report on action 4 of the OECD project on base erosion and profit shifting (BEPS). The rules aim to restrict tax deductions made by a group in relation to interest expense and other financing costs. The deductible amount will be restricted to an amount commensurate with the group’s taxable activities in the UK. To arrive at that amount the rules take into account the amount the group borrows from third parties. The rules are to apply for periods beginning on or after 1 April 2017.
The rules apply to all groups within the charge to UK corporation tax but the restriction will not apply to groups with less than GBP 2 million of net interest expense and other financing costs per annum.
