HM Revenue & Customs (HMRC) published a consultation document in March 2012 on possible changes to the income tax rules on interest. Those changes included the following proposals:

In April this year we reported on a consultation by HM Revenue & Customs (HMRC) on possible changes to the taxation of interest, namely:

  • repealing the "quoted Eurobond" exemption for Eurobond issues to group companies listed on a stock exchange on which there is limited trading in the Eurobond;
  • requiring tax on funding bonds (PIK notes) to be paid to HMRC in cash; and
  • abolishing the distinction between "yearly" interest and "short" interest.

HMRC has now published its 'Summary of Responses' to that consultation in which it announced it will not be taking those proposals forward.

The responses to the consultation were largely against the proposed changes on the basis, broadly, that they would have resulted in additional complexity and uncertainty for businesses, with no obvious revenue gain and with potentially adverse consequences for the UK's competitiveness. The government has clearly taken these objections on board.

The announcement will largely be welcomed by taxpayers as the changes would clearly have required a review of existing financing arrangements and possible (expensive) changes in structure.

Certain changes to the taxation of interest will go ahead though, for instance:

  • although tax deducted on funding bonds will not have to be paid in cash, the issuer will be required to issue a certificate indicating its value on issue
  • the government will also introduce a disguised interest rule for income tax, modelled broadly on the corporation tax rules

HMRC will also be revising its guidance on short loans which are repeatedly rolled over, which will be something to watch out for and on which we will provide a further alert.