The announcement of a snap general election had an immediate impact on some of the most eye-catching announcements for corporates from the Spring Budget and Finance Bill, with the parliamentary wash-up seeing key clauses dropped from a foreshortened Finance Act 2017, which received royal assent on 27 April.
These included clauses relating to making tax digital, corporate loss relief and penalties for enablers of defeated tax avoidance schemes, amongst others. Clauses in relation to corporate interest deductibility were also dropped and this article focuses below on the potential impact of this particular omission.
Based on government and opposition statements before parliament was dissolved, the expectation is that many, if not all, of the provisions dropped will return in a new Finance Bill after the election, regardless of who forms the next government. The Queen's speech is scheduled to take place on 19 June, after the new government is formed, and this means that the new Bill could be enacted before the summer recess begins on 21 July. However, this leaves very little time to scrutinise what remains of the longest Finance Bill on record, and history suggests that any new Finance Bill after a Spring election is more likely to be enacted in the Autumn.
Corporate interest deduction restrictions – on hold (for now!)
Readers will be aware that new legislation relating to corporate interest deductions was intended to be effective from 1 April 2017. It is designed to restrict the amount of interest expense that companies can deduct when calculating their taxable profits, in line with Action 4 of the OECD’s base erosion and profit shifting (BEPS) project.
Its key headlines are:
- the introduction of a de minimis threshold amount for net UK interest expense of £2m which, subject to other applicable rules, all groups would be able to deduct on an annual basis; and
- for groups with net UK interest expense above this £2m threshold, a fixed rate ratio which would restrict deductions to the higher of 30 per cent of UK tax adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) or a group interest ratio based on group accounting profits, all subject to a modified debt cap rule.
What will happen to these rules?
Unfortunately, we do not know what will happen following the election in June, but the following scenarios could arise.
- Legislation introduced as originally drafted – as the driver for these changes appears to have cross- party support, the proposed corporate interest legislation is likely to be picked up again, in full or largely unchanged , in the expected Finance Bill later in the year.
- Proposals dropped altogether – although unlikely, a new government could scrap the corporate interest deduction proposals completely.
- Amended legislation – Finance Bill 2017 included 156 pages on these rules alone. It is possible the legislation could be significantly amended to reduce complexity.
This leaves the issue of timing. Whilst corporate groups may have already taken the proposed changes into account in their decision making, it is unlikely that a delay in the introduction of this legislation will disadvantage them. There is nothing to prevent the rules from applying from 1 April 2017 as originally intended, but a later start date is also possible.
What are groups doing?
As was the case previously, we are seeing some groups undertaking forecasts at this stage, so that they can model the potential implications of the changes and are therefore prepared, if and when the legislation is introduced.
However, for others, this work has moved further down their priority list, until clarity on this proposed legislation is obtained later in the year.
The reality is that the proposed legislation is far more complex than the headline bullet points above suggest, and groups will need to understand the implications in some detail if it is enacted.
How RSM can help
RSM can work with companies affected to help them understand this proposed legislation and the potential implications on their particular circumstances.