Autumn Statement 2016: Base Erosion Profit Shifting (BEPS)

UK companies are currently able to deduct all of their interest expense subject to any applicable transfer pricing requirements. In addition, larger UK companies/group can be subject to further restrictions under the worldwide debt cap regime, which effectively restricts the UK deduction for interest to the lower of the actual net UK interest expense and the worldwide group’s net third party interest expense.

As part of the Base Erosion Profit Shifting (BEPS) initiative undertaken by the Organisation for Economic and Development (OECD), the Government announced, in May 2016, a consultation outlining further reforms to prevent BEPS through the use of interest expense.

Under these proposals, which were intended to apply from 1 April 2017:

  • Restrictions will be placed on the tax deduction for companies/groups, which have a net interest expense of more than £2million.
  • Deductions for net interest in excess of £2million will be restricted to 30% of the UK Company’s Earnings Before Interest, Tax,
  • Depreciation and Amortisation (EBITDA).
  • The worldwide debt cap will be repealed but similar provisions will be introduced to ensure that a group’s net UK interest deduction does not exceed the worldwide group’s net third party expense.
  • Specific rules will be introduced to protect investment in public benefit infrastructure and those operating in the banking and insurance sectors.

Following the consultation, the Government confirmed in the Autumn Statement its intention to implement these reforms with effect from 1 April 2017. The Government has also confirmed that it will widen the proposed provisions to protect investment in public benefit infrastructure but the banking and insurance sectors will now also be subject to the rules in the same way as other groups.

This restriction should only apply to large companies and groups. HMRC estimated at the time of the consultation that 95% of corporate groups would fall outside the scope of the rules. Most companies will therefore still be able to fully deduct their interest expense as before.

This restriction will, however, be particularly felt by the larger companies/groups operating within industries such as real estate and infrastructure which commercially operate at higher levels of gearing.