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Spring Budget 2017: Tax deductibility of corporate interest expense

Tax deductibility of corporate interest expense

Some changes to the draft Finance Bill 2017 legislation on tax deductibility of corporate interest expense have been announced.


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As previously announced and consulted upon, a new corporate interest restriction regime is being introduced, which will apply from 1 April 2017 regardless of a company’s year-end. The new rules will restrict each group’s net deductions for interest based on a percentage of UK earnings before interest, tax, depreciation and amortisation (EBITDA) limited by the net interest expense of the worldwide group.  Up to £2 million of net interest expense per annum in a group will not be restricted by these rules.

The Spring Budget announced a number of changes to the draft Finance Bill 2017 legislation previously published.  The aim of these changes is to ensure that the rules do not give rise to unintended consequences or impose unnecessary compliance burdens. These changes include:

  • The restriction on relief for interest is based, in part, on a measure of the net financing cost recognised in the income statement in the group accounts, known as the modified debt cap.  This modified debt cap rule is being amended to make it easier to utilise interest expenses which have been disallowed in an earlier period;
  • Interest on debt guaranteed by related parties can be treated as related party interest, which could result in a restriction on relief for interest.  This rule will not apply to certain performance guarantees and all guarantees granted before 31 March 2017, nor will it apply to intra-group guarantees when calculating the alternative group ratio percentage in the context of the group ratio method;
  • The definition of interest will now include income and expenses from dealing in financial instruments as part of a banking trade;
  • Rules will be introduced for insurers regarding the calculation of interest on an amortised cost basis to provide a practical alternative to fair value accounting; and
  • The corporate interest restriction regime will include optional alternative rules for public benefit infrastructure.  These are to be amended so that it will be easier to apply in practice.  There will be no need to compare the level of indebtedness of companies qualifying for these rules with that of non-qualifying group companies, such as those outside the UK, and transitional rules will apply in the first year so that a business has time to restructure if necessary to qualify for the alternative rules.

HMRC have engaged in a helpful consultation with interested parties and the changes which have been announced are expected to improve the workings of the rules.  However, there is still likely to be a significant compliance burden from applying the new corporate interest regime, and there may be unexpected results.


For further information, please contact: 

Rob Norris

Tel: +44 (0)121 232 3367



Mark Eaton

Tel: +44 (0)121 232 3405


Spring Budget 2017

Spring Budget 2017

Spring Budget 2017

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