Update on the tax deductibility of corporate interest expense

Deloitte update on the implementation of the new interest deductibility rules, including the outcome of a recent meeting between HMRC and the Federation.

15 March 2017

Over the last few months the Government has released draft legislation and guidance in response to the OECD’s Base Erosion and Profit Shifting (BEPS) Best Practice recommendations for Action 4, introducing the new interest restriction provisions that will be effective from 1 April 2017.

The key elements of these rules remain as announced at the consultation stage. Corporate tax deductions for net interest expense will be limited to 30% of a group’s UK tax EBITDA subject to a de minimis group threshold of £2m, and the potential application of the group ratio rule to help protect a higher level of interest deductibility for groups with high third party gearing.

In addition, the legislation includes some rules to ensure that the restriction does not impede the provision of private finance for certain public infrastructure projects in the UK. While it was previously hoped that these rules may mean that housing associations and their finance arrangements may fall outside of the rules altogether, the final legislation suggests that due to the specific nature and requirements of these rules it is not considered that they will be widely applicable to housing associations.

Federation meeting with HMRC

The Federation has continued to work with Deloitte to respond to HM Treasury’s previous rounds of consultation on matters pertinent to housing associations as well as reviewing the draft legislation to consider the application.

As a result of further comments made on the draft legislation, the Federation was invited to discuss the concerns relevant to housing associations directly with the HMRC team responsible for the implementation of the new interest deductibility rules. As part of the constructive dialogue that followed, the following points in particular were confirmed:

A charitable organisation, such as a Community Benefit Society that commonly parents a housing association group, will not fall within the definition of a public body and therefore may head up a relevant ’group‘ for these purposes. This is important as it means that in the scenario where a treasury company and a trading company are both subsidiaries of a charitable organisation, these will likely be considered to be in the same group and therefore the group ratio rules should allow for the group to deduct all third party interest payments.

Interest payable by a trading subsidiary to a charitable parent will not be subject to the restrictions, where a payment from the trading subsidiary to the charitable parent could be made via a qualifying charitable donation (commonly referred to as a Gift Aid payment).

The specific implications of BEPS 4 will depend on the facts and circumstances in each case, although the above are likely to be helpful in ensuring that the majority of housing associations do not suffer restrictions on interest deductions.

We recommend that you speak to your advisors to confirm if this is the case under the specific circumstances of your housing association and funding.