In its response to the consultation on tax deductibility of corporate interest expense, now closed, ICAEW described the government’s response to BEPS action plan 4 as potentially involving ‘a major recalibration of the UK domestic tax environment’ and warned the proposed changes could have a negative impact on business and on the UK as a desirable business location.

ICAEW said it had concerns that as the BEPS recommendations are so complex, there will always be scenarios which were not envisaged at the time the government drafts the new rules, giving rise to concerns that companies could be caught when they should not be and end up with a restriction even though there is no BEPS.

The institute wants the rules to include a backstop provision which provides a general exclusion from the rules where there is no BEPS. It says this could then be coupled with a clearance process for areas of uncertainty. 

It is also calling for the introduction of additional balancing reliefs, such as enhanced capital allowances, which it says might go some way to addressing the impact for some UK groups.

For its part, CIOT said in its contribution to the consultation that it is not convinced new rules are required, arguing that existing UK tax rules and other changes proposed under the BEPS action plan will address the issues.

Glyn Fullelove, chairman of CIOT’s international taxes sub-committee, said: ‘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%. This risk will be reduced further when the rules to counteract hybrids and other mismatches take effect.

‘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.’

However, CIOT says it acknowledges the government is likely to introduce a structural interest restriction in the UK along the lines of that proposed by the OECD and says there is a merit in having rules which are consistent with those which are introduced by other countries, provided all implement similar rules.

If the proposals outlined in the consultation do go ahead, CIOT has a number of recommendations. These include that interest on third party debt should not be restricted by the regime without good reason, with the institute stating that so far it has not heard any such reason why this would be the case in the UK.

CIOT says the regime should be a replacement for worldwide debt ca, and some other interest restrictions (such as those which rely on ‘main purpose’ tests which cause difficulty in practice because of the vagueness of the tests).

It should also be designed to exclude companies which pose little risk of BEPS, such as those which are purely domestic, 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%, CIOT argues.

CIOT also wants to see 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. It says 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.

Given the complexity of the issues, both ICAEW and CIOT are calling for the government to delay any implementation of a structural interest regime beyond the earliest proposed implementation date of April 2017.

Fullelove said: ‘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.’

Details of the consultation, which closed on 14 January, are here

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