What are the rules for corporate interest tax deductions?
From 1 April 2017 new rules were introduced governing the amount of interest that UK companies can deduct for corporation tax.
Provided that the worldwide group’s net interest deductions in the UK do not exceed £2 million no restriction applies. If, however, the group’s UK net interest payable exceeds £2 million, the UK tax deductions are capped in one of two ways:
Either at the lower of 30% of the UK company’s taxable EBITDA and the worldwide group’s net external interest expense (the debt cap); or
At the lower of the debt cap or an amount calculated by reference to group qualifying net interest payments divided by group EBITDA.
The default position is that the interest restriction is allocated across the UK group in proportion to each company’s share of the net interest expense. It is possible though to appoint a group reporting company to apportion the restricted amount by filing a group interest restriction return. Even where no restriction is required groups may benefit from appointing a group reporting company.
The advantage of having a group reporting company is that the restriction can then be allocated across as best suits the group, with surplus interest payments being carried forward indefinitely for deduction against surplus allowance in future years. In addition, any surplus allowance can be carried forward for up to five years and used on a first in, first out basis.
It could well be that the flexibility afforded by filing a group interest restriction return justifies the additional compliance burden. In that case, the identity of the group reporting company must be notified to HMRC within six months of the end of the first accounting period for which their appointment applies.
The new rules are complex and can affect members of larger international groups, so if they apply to your company you should seek professional advice. The Ensors corporate tax team would be happy to assist.
To view our other blog posts in this series on large corporate compliance, please click here.