Banks should consider the following measures when setting interest cover ratios or assessing affordability in new facility agreements, especially for larger corporate borrowers.

  • Carry-forward of loss relief is to be restricted for all companies on an ongoing basis. This will restrict set off of carried forward losses to 50% of profits in an accounting period (after application of in-year losses).  This rule will apply to company profits over £5m p.a. and will come in force from April 2017.
  • Interest deductibility against corporate profits is also to be limited by a 30% EBITDA ratio.  Excess interest will not be tax deductible for the company.  This rule will apply to interest expenses over £2m and will come into force from April 2017.
  • Set against these measures is the continuing reduction in rates of corporation tax, to 17% by 2020.  
  • Loan affordability for smaller businesses trading from physical premises will be enhanced as they are taken out of paying business rates (or pay a lower rate), for many small businesses business rates being the single largest tax cost of operation.

Corporation tax reforms - banks

For banks with pre-2015 losses, such losses can only be used against 25% of the taxable profits.  This rule will come into force from 1 April 2016.

In other words, for banking groups profitable since 2015, at least 75% of profits will be charged to corporation tax at 20% and to bank corporation tax surcharge at 8%, even where historical losses exceed current profits.  Worked example for a bank or building society:

Click here to view table.

As already announced, withholding tax at source is abolished from April 2016 on bank and building society interest payments to savers. This is being extended from April 2017 to cover all interest paid via P2P operators and collective investment vehicles. This brings these operators into line with banks and building societies.

Apprenticeship Levy

Large employers, banks and building societies will face a charge of 0.5% on the paybill from 2017. Our discussions with large corporate clients to date indicates that while many have large existing expenditures on internal and external training which could potentially be ‘matched’ with the apprenticeship levy funds, the necessary steps to put businesses in a position to claim such funds have not yet been undertaken.