RSM warns that the UK property sector could lose out as HMRC consults on aggressive tax avoidance

Following the OECD’s recommendations on tackling aggressive tax avoidance last October, the UK government is now consulting on changing its current rules on the deductibility of corporate interest.

But RSM is raising concerns that these proposed measures could have a damaging effect on the real estate and property sector in the UK.

The consultation document is seeking views as to whether certain measures should be introduced, including:

  • a fixed ratio rule which would limit interest deductions to a percentage of a company’s  EBITDA with the current proposal being 10 per cent - 30 per cent;
  • a group ratio rule that would allow a company to deduct net interest expense based on the group’s net interest ratio, for example where this is higher than the fixed ratio;
  • the option to carry forward disallowed interest/unused interest capacity and/or carry back of disallowed interest; and
  • a de minimis threshold to remove low-risk entities.

Ken Almand, Tax Partner for RSM, said:

‘Cracking down on tax avoidance is high on the government’s agenda, and many businesses will accept these proposed measures as part of this important piece of work. However, now we know the full details of the consultation, I have real concerns that this may have a serious detrimental effect on the UK real estate and property industry, especially at a time when businesses in these sectors are starting to see improvements following the economic downturn. 

‘The key tests proposed will cause interest to be restricted based on how much a company earns with no consideration for the value of its assets, which for most businesses will be fine. However the real estate and property sectors may struggle here as in many cases the value of their property portfolios support a higher borrowing capacity under the current rules than that afforded by their  earnings, especially if those earnings are cyclical in nature.'

‘The government is keen to hear feedback from businesses about these proposed changes, and I urge anyone with concerns to raise them before the consultation closes on 14th January 2016. 

‘The need for variations to the rules for the banking and insurance industries has already been recognised, and so we know that the government is open to being flexible where businesses can make a good case for change. Anyone wanting to make a representation should do so now as if these changes become law, there’s no going back.’ 

More details of the consultation are available on the HMRC website.