To most people, 1 April is still associated with April Fool’s Day when weird and wonderful stories are published for people to wonder whether they are real or not. Unfortunately, one story that will fit into the ‘real’ category is that concerning the changes to interest deductibility and restrictions on loss relief that will take effect on 1 April 2017, courtesy of the UK government. Thus, there is only a limited time left to get prepared.
The story starts with the Base Erosion Profit Sharing Action Plan initiated by the OECD. In December 2016, the OECD released an updated version of the BEPS Action 4 Report ‘Limiting Base Erosion Involving Interest Deductions and Other Financial Payments’. One of the areas covered in Action 4 is the introduction of a group ratio rule. It seeks to limit an entity’s net interest deductions to a set percentage of its tax-EBITDA while, at the same time, enabling an entity to potentially claim higher net interest deductions based on a relevant financial ratio of its worldwide group. The original report on Action 4 was issued in 2015 and the updated version does not change any of the conclusions in that original report, but provides more technical detail in applying the group ratio rule, such that governments can take into account particular features of their own tax law and policy.
Also in December 2016 the UK government did of course issue their own draft legislation on how they propose to implement Action 4, by introducing rules to limit the tax deductions that large businesses can claim. This was followed by a further release in late January 2017. While the main principles of the rules may seem to some to be relatively straightforward, the legislation is complex and requires a number of adjustments. Also, a number of elections may be required to obtain the most beneficial outcome. Some of the elections are irrevocable once made or may only be made as part of a package of alternative calculations, some elements of which could be beneficial and others not. Groups will need to review the potential impacts and consider whether refinancing or restructuring is necessary.
The important area to note is that, as referred to above, even though the legislation is only in draft (and may be changed in debate on the 2017 Finance Bill) and issued recently, implementation day is still 1 April 2017 and that is not for accounting periods (APs) beginning on, or after, 1 April 2017. Therefore companies with APs straddling 1 April 2017 will have to split that AP into two for the purposes of interest deductions and apply the limitations in the draft legislation to that second period.
As also noted above, the 1 April 2017 date is also relevant for restriction of losses to be used against profits. Losses carried forward, whenever they arose, can only be set against 50% of future profits. There is to be an annual allowance of £5m of profits before the restriction applies, but that limit applies to the group as a whole.