HM Treasury has published a consultation on the tax deductibility of corporate interest expense in the UK. The consultation has been prompted by the recent publication by the Organisation for Economic Co-operation and Development (“OECD”) of its final Base Erosion and Profit Shifting (“BEPS”) reports, in particular BEPS Action 4, and has potentially significant implications for a range of sectors, especially capital intensive ones eg infrastructure and real estate.

BEPS Action 4

BEPS Action 4 (“Limiting Base Erosion Involving Interest Deductions and Other Financial Payments”) deals specifically with limits on corporate interest deductions. The OECD proposals include a fixed ratio rule, which would limit the deductibility of interest with reference to a net interest to EBITDA ratio of between 10% and 30%, while making certain concessions, such as for groups to apply a group ratio rule and a carve out for public benefit projects. More specifically, the proposals cover all debt funding, including third party debt, subject to potential de minimis limits.

HM Treasury Consultation

The consultation seeks views on how the BEPS Action 4 should be implemented in the UK. At the same time, the consultation document makes clear that the “government believes that the new rules on interest deductibility as set out in the OECD report are an appropriate response to the BEPS issues identified”. To implement the OECD recommendations, the UK would need to introduce a new general rule for restricting interest relief, which would operate after other existing anti avoidance rules such as transfer pricing limitations have been applied. The consultation acknowledges that this will be a major change to the UK corporation tax regime, and seeks to explore ways to do this fairly while maintaining the UK’s competitive business environment.

The deadline for responses is 14 January 2016.