Budget 2016: Tax deductibility of corporate interest expense

Currently, companies can generally claim a corporation tax deduction for the interest they incur on their borrowings, subject to existing rules on loan relationships and transfer pricing.

From 1 April 2017 a restriction on the deductibility of corporate interest will be introduced following OECD recommendations in relation to the BEPS project.

There will be a fixed ratio rule that limits the corporation tax deduction for net interest expense to 30% of the group’s UK taxable earnings. There will be a de minimis threshold of £2m of net UK interest expense.

The existing worldwide debt cap rules will be repealed.

Provisions will be introduced to ensure that these changes do not have an adverse effect on large infrastructure projects.

These changes are designed to ensure that multinational groups do not obtain UK corporation tax relief for borrowings in excess of what they require in the UK and to remove competitive distortions that could arise as a result.