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How will Finance Bill affect UK-based corporate tax?

The UK's Finance Bill 2017 could gain the British government £4 billion by 2021. UK-based corporate treasurers should be up-to-date on how the new interest restriction laws could affect their company and cash flows.

Clamping down on evasion?

The legislation aims to to tackle tax evasion and support companies in the British tax system. Apart from its aim to cut corporation tax to 17 per cent by 2020, the government bill's other proposals include:

  • prevent the use of disguised remuneration schemes that help people avoid National Insurance and income tax;
  • introduce a new penalty for those who enable the use of tax avoidance schemes that are later defeated by HMRC; and
  • create a new legal requirement to correct a past failure to pay UK tax on offshore accounts and investments with tough new sanctions for those who fail to do so.

These changes are due to take effect from 1 April this year, so companies in the UK should already be ensuring they understand the changes and how their company will be affected.

A point of interest

However, it's the rules around how companies claim tax deductions for interest expenses and losses, and reforming the rules around salary sacrifice, which could have the biggest impact from the point of view of corporate treasury and tax professionals. PwC's Graham Robinson writes in the company's treasury blog that the new rules will affect a company's ability to deduct interest from taxable profit to the lower of:

  • a defined percentage of taxable Ebitda (i.e. Earnings before Interest, Taxation, Depreciation and Amortisation). This will be either 30 per cent or a percentage based on the group’s worldwide interest/Ebitda ratio; and
  • the worldwide consolidated net interest expense of the group.

Robinson, a tax partner, also states that some companies will have “limited flexibility to carry forward disallowed interest (or excess capacity) for relief in other periods”. He adds: “For many, these new rules will significantly restrict the offset of interest expense against taxable profits. In many cases, there will be additional cash tax payable, and this cost could effectively increase the cost of capital for the business and increase net debt.”

'Some will pay cash tax much sooner than they expect'

UK-based companies now have just over a month to ensure they are up-to-date with the tax rules. Corporate treasurers are advised to consider their cash management and tax compliance strategy and to consider whether a business reorganisation will lessen the impact of the new tax rules. PwC notes there are special rules for companies engaged in ‘public benefit infrastructure’ projects, real estate investment trusts (Reits) and charities.

Another aspect companies should be aware of are differences in timing caused by fluctuations in taxable Ebitda, interest expense, and other variables. Robinson states: “It will be important to establish whether the carry-forward mechanisms will give effective relief in future years. This is particularly critical where groups have losses, as new restrictions on the use of historic losses against current profits may mean that some groups are paying cash tax much sooner than they expect.”

CTMfile take: Companies have been given very little time ahead of the 1 April 2017 date to prepare for what the the Finance Bill will mean for corporate interest deductibility. Some further explanation of how companies will be affected is given in this LetsTalkTax blog by Rosemary Blundell, of Mazars.

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