The measure is a response to Action 4 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, to counter the use of aggressive avoidance.

The draft guidance, running to 285 pages, is designed to assist understanding of the application of the corporate interest restriction legislation in Schedule 10 of Finance Bill 2017, which takes effect from 1 April 2017.

The draft guidance will be updated as necessary in the light of comments received with plans to release further draft guidance on 31 May.

The rules will affect groups with more than £2m of net interest expense and other financing costs per annum for periods of account starting on or after 1 April 2017. The compliance costs are expected to be substantial as companies review their current accounting and tax treatment of interest.

Periods of account straddling 1 April 2017 are treated as two notional periods. A notional period ending 31 March 2017 is subject to Part 7 of TIOPA 2010, commonly known as the world-wide debt cap (WWDC). Only the notional period commencing 1 April 2017 is subject to the corporate interest restriction.

The aim of the rules is to restrict a group's deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking account how much the group borrows from third parties. Amounts that are disallowed in one accounting period may be carried forward and may potentially be deducted in a subsequent period.

The rules will operate on a worldwide group basis based on International Financial Reporting Standards (IFRS) consolidation rules for each period of account of the group’s ultimate parent. This will allow groups to manage any restriction across their UK businesses.

Groups can nominate one company to file for the whole group.

The default fixed ratio method imposes two main limits on the group's tax-interest deductions. The first is by reference to a fixed ratio of 30% of the taxable earnings before tax-interest, depreciation and amortisation (tax-EBITDA) of group companies in the charge to corporation tax. Tax-EBITDA and tax-interest are measured by reference to amounts taken into account in computing corporation tax. The second is a debt cap, designed to limit the net tax-interest to a measure of the worldwide group's net external interest, and economically similar, expense.

Ben Moseley, partner at Deloitte LLP, said: ‘The updated legislation was broadly in line with what we were expecting and we welcome two of the key changes.

‘Firstly, the “debt cap” has been amended to allow groups to carry forward an “excess” to future periods, this was required because the “modified debt cap” in the previous legislation created some unintended consequences, particularly for wholly UK groups with volatile EBITDA.

‘Secondly, the public infrastructure exemption conditions have been relaxed slightly, in particular there is increased flexibility in the first year to allow for transitional arrangements. Several other changes have been made to fix identified issues; although some still remain and a regulatory making power has been added to enable future amendments.

‘There are now relatively few major issues remaining, but the compliance burden for companies will remain significant.’ 

This is an initial tranche of guidance, focusing on the core rules and other aspects where guidance has been specifically requested. Further draft guidance will be issued by 31 May 2017.

Comments should be sent to the HMRC corporate interest restriction team by email to [email protected]. Comments can be sent in batches, but all comments should be submitted by 31 July 2017.

The HMRC guidance CFM95000: Interest restrictions is available here