The Base Erosion and Profit Shifting project (BEPS) was launched by the OECD and G20 countries in 2013. It is a global initiative rather than solely European and as such, Brexit is not relevant. The UK is keen to be perceived as a prime mover of the project.

BEPS aims to deal with companies using tax ‘arbitrage’. As HMRC summarised in its October 2015 consultation, ‘international tax rates have not kept pace with globalisation…which has led to some multinational enterprises exploiting the rights to pay little or no tax’.

In September 2013, the OECD’s 15 Point Action Plan on BEPS was approved by the G20. It was then mandated to research and identify ways of providing more standardised tax rules. Phase 1 of the project involved publishing recommendations, and this was completed in October 2015. Phase 2, currently in progress, requires the implementation and monitoring of those recommendations.

Point 4 of the Action Plan relates to the tax treatment of interest on loans.

The OECD’s report highlights three ways in which multinationals currently mitigate interest expense:

  • placing higher levels of third party debt in high tax countries
  • using intragroup loans to generate interest deductions that do not reflect a group’s actual third party interest expense
  • using either third party or intragroup financing to generate exempt or deferred income.


HM Treasury and HMRC consulted on the tax deductibility of corporate interest expense in October 2015. A more detailed consultation was published in May which closed on 4 August 2016.

The Government have announced that new rules implementing BEPS, concerning the tax deductibility of interest payments, will apply from 1 April 2017.

The following are key proposals from the latest consultation:

  • a UK group’s tax deductions for interest expense will be limited to 30% of its EBITDA (earnings before interest, tax, depreciation and amortisation) in what is known as the Fixed Ratio Rule (FRR)
  • groups with a net interest expense of less than £2 million per annum will not need to limit their deductions for BEPS purposes
  • all groups will be able to deduct interest expense of £2 million a year before applying the BEPS limits to deductions
  • a separate rule may assist highly leveraged groups, and could be applied instead of the FRR to mitigate tax exposure – the Group Ratio Rule
  • the ‘carry forward’ of excess interest capacity for up to three years may be permitted. This will be useful where a group did not reach the 30% EBITDA threshold
  • restricted interest will be carried forward and is deductible in subsequent periods. There is flexibility for groups to allocate this to any or all of their particular companies
  • existing UK worldwide debt cap rules will be repealed for accounting periods beginning on or after 1 April 2017.

HMRC and the Treasury are still considering how BEPs should apply to banking and insurance companies. Also being considered is whether the new rules should be extended to companies paying UK income tax (e.g. resident landlords receiving UK rental income).

How will BEPS affect borrowers and lenders?

Borrowers may experience the following:

  • a considerable increase in tax expense and therefore an increase in the cost of borrowing
  • volatility in tax expense across the Borrower group, in the light of tax planning around BEPS and the new regime
  • a greater compliance/administrative burden for companies assessing the implications of, and applying, the new rules
  • less capacity for shareholder debt in the light of increased borrowing expenses.


A number of significant voices have been lobbying for a deferral of the proposed rules. Last month, the Chartered Institute of Taxation published its response to the May consultation, stating that the start date of April 2017 is too ambitious and suggesting 1 January 2019 as a reasonable alternative.

In the light of uncertainty following Brexit, there are likely to be more calls to reconsider timings for a change to the tax regime which some consider will dampen foreign investment in British business.