Anger at plans to curb UK’s business-friendly tax regime
Plans to restrict the generous tax treatment of interest costs — a key aspect of Britain’s business-friendly taxation regime — are unnecessary and potentially damaging, companies have told the Treasury.
Professional bodies and business groups are voicing fears about the restrictions that are set to be introduced as part of a global crackdown on corporate tax avoidance.
The Chartered Institute of Taxation said it did not believe the UK needed to tighten its rules, which will restrict the interest costs that can be deducted when a company calculates its taxable profit. The sharp decline in the corporate tax rate has reduced the incentive for companies to reduce their tax bills by putting large amounts of debt into the UK, it said.The Institute of Chartered Accountants in England and Wales said businesses had “major concerns” and warned that changes to the “current, relatively benign, regime for interest deductibility” could have a negative impact on the UK as a desirable business location.
The CBI, the business lobby group, said “that the UK’s competitiveness would be undermined if the UK were to act hastily or without due care and attention to the impact of the proposals relative to the responses being made by other countries”.
Glyn Fullelove, chairman of one of the institute’s committees, said: “While we recognise the need to tackle this issue globally, we are unconvinced of the practical need to introduce a structural interest restriction here in the UK.”
But the institute added that, despite its reservations, it believed the government was likely to introduce a structural interest restriction in the UK along the lines proposed.
The restrictions form an important part of the recommendations put forward in September by the OECD to curb “base erosion and profit shifting”. It described debt as “perhaps one of the most simple of the profit-shifting techniques available in international tax planning”.
Many of the respondents to the Treasury’s consultation urged it to adopt a 30 per cent ratio, which would be in line with countries such as Germany. But even a ratio as high as 30 per cent would hit most infrastructure, real estate and utility companies, according to Treasury minutes of a stakeholder meeting in December.The interest deduction should be no more than 10 to 30 per cent of earnings, the OECD said. In other words the ratio of interest to a company’s earnings before interest, taxes, depreciation and amortisation should be 10-30 per cent.
The commercial property industry would pay an extra £660m of tax a year under a rule with a 30 per cent ratio, according to analysis by the British Property Federation. It said the tax rate for companies would shoot up from under 20 per cent to between 28 per cent and 32 per cent.
But this outcome would largely be averted if the Treasury goes ahead with introducing a second test — put forward as an option by the OECD — that reflected a group’s overall gearing. Many of the submissions to the Treasury consultation said the use of this broader measure was crucial to protect capital intensive and heavily-geared sectors, even though it would not provide a full deduction for third party interest in all cases.
PwC, professional services firm, body, said a group ratio rule of this sort was “vitally important”.
In its consultation, the government said it recognised that tightening the tax rules on interest would be a big change and said “careful consideration is required to ensure any new rules work appropriately”.
