Interest deductibility

Two separate proposals are contained in the draft legislation, relating to the deductibility of interest expenses:

• Introduction of a worldwide debt cap will apply by restricting the deduction for intra-group interest claimed by UK members of a multi-national group where the interest borne in the UK is greater than the group’s consolidated net external finance costs. The rules are very complicated and detailed discussions are on-going on how to simplify them. For inward investors, which are cash rich or have little external debt, the rules could restrict the possibility of debt funding UK operations.
• The existing unallowable purpose rules for loan relationships are to be extended. Again this is widely drafted so as to disallow interest on a loan which is part of a scheme or arrangement which has the avoidance of UK tax as one of its main purposes. The rule may deny interest deductions on loans entered into before the new legislation is introduced.