The government plan to shake up the taxation of corporate debt contracts raises concerns for practitioners

The government's stated aim in the current consultation document, Modernising the taxation of corporate debt and derivative contracts, is to provide simpler and fairer tax treatment, minimising the scope for abuse, reducing uncertainty and improving structural and legislative clarity as well as reducing administrative burdens. Given the lack of detail in the consultation document, it is difficult to say whether the objectives will be met, although there are a number of areas of concern.

A loan relationship is defined as a money debt arising from a transaction for the lending of money. While 'money debt' is defined, there is no definition of 'lending of money' in the legislation, so some clarification would be welcome. The consultation document clearly states: 'Nothing in this document is intended substantively to change the effect of the existing definitions of what constitutes a loan relationship.' This is a pity as it is an area ripe for reform.

The proposal to scrap certain tax relief provisions for debt restructuring is concerning. This may mean that the only tax-efficient way to restructure will be in a distressed situation, which is likely to make the UK a less competitive place to do business. It may also lead to an increased number of clearance applications as companies seek assurances that tax-efficient treatment will apply. This runs counter to the stated objective of seeking simplification.

The consultation document also proposes that interest payable would only be deductible to the extent that a company had the capacity to make the payments. This is of particular concern to start-up companies and will create problems for groups of companies where a new subsidiary is supported initially by loans from the parent company. It is unfair to deny a loss-making company a tax deduction on the interest payable on the loans it requires to fund its growth and future profitability.

The most significant structural changes to be introduced are expected to take effect in July 2015. Again, this goes against the stated aim of reducing administrative burdens as it follows major changes to accounting standards, which will take effect only six months earlier, in January 2015.

Jonathan Riley is senior tax partner at Grant Thornton UK LLP