Initial implementation costs for businesses operating in the UK are estimated at around £16m for those affected, while ongoing administrative costs are likely to be around £6.4m a year. HMRC will also have to invest up to £300,000 in upgrading IT to meet the reporting requirements.

Billed by government as a measure to raise substantial tax revenue from larger businesses and corporations, and to a degree to reflect the aims of the OECD’s Base Erosion and Profit Shifting (BEPS) action plan, the Treasury has estimated that the clampdown on interest deductions will raise around £1.1bn in revenues a year. This figure has been revised upwards from £920m in the original HMRC estimates.

The rules posed a number of issues and draft legislation was issued in December and subsequently updated on 26 January before the finalised wording was agreed.

This change will affect large businesses within the charge to corporation tax which incur net interest expense and other similar financing costs (within the scope of corporation tax) above £2m per annum. The existing debt cap rules in Part 7 of Taxation (International and Other Provisions) Act 2010 (TIOPA) will be repealed and replaced with the new rules.

Following consultation, the government will introduce legislation with effect from 1 April 2017 to limit the tax deductions that companies can claim for their interest expenses.

The new rules will restrict each group’s net deductions for interest to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) that is taxable in the UK.

An optional group ratio rule, based on the net-interest to EBITDA ratio for the worldwide group, may permit a greater amount to be deducted in some cases. The legislation also provides for repeal of the existing debt cap legislation and its replacement by a modified debt cap which will ensure that the net UK interest deduction does not exceed the total net interest expense of the worldwide group. All groups will be able to deduct up to £2m of net interest expense per annum, so groups below this threshold will not need to apply the rules.

Draft legislation was published on 5 December 2016 with a further update on 26 January 2017.

As a result of feedback, the government has made changes to the proposed rules which will be reflected in Finance Bill 2017.

This is designed to ensure the rules do not give rise to unintended consequences or impose unnecessary compliance requirements.

The revised rules include:

• certain unintended restrictions arising from the modified debt cap that could prevent deductions for carried forward interest expense will be removed;
• the optional alternative rules for public infrastructure will be easier to apply in practice - there will be no need to compare the level of indebtedness of companies qualifying for these rules with that of non-qualifying group companies, such as those outside the UK, transitional rules will apply in the first year so that business have time to restructure if necessary to qualify for the alternative rules;
• the rules treat interest on debt guaranteed by related parties as related party interest, which can be subject to restriction - this rule will not apply to certain performance guarantees and all guarantees granted before 31 March 2017, nor will it apply to intra-group guarantees in the context of the group ratio rule;
• the definition of interest will include income and expenses from dealing in financial instruments as part of a banking trade; and
• rules will be introduced for insurers regarding the calculation of interest on an amortised cost basis to provide a practical alternative to fair value accounting.

Related HMRC documentation

The Draft legislation: corporate interest restriction issued on 26 January 2017 is available here

The joint HMRC/Treasury consultation on corporate interest restriction – detailed policy design and implementation issued on 5 December 2016 is available here

The tax information and impact notice, TIIN Corporation Tax: tax deductibility of corporate interest expense, published 5 Dec 2016, is available here