On 12 May 2016, HMRC issued a further consultation on the detailed application of new interest barrier rules which will come into effect from 1 April 2017. The proposed new rules will limit finance cost deductions in a UK group to the higher of £2m and 30 per cent of UK taxable EBITDA (or, if greater, the proportion of UK taxable EBITDA that that group third party finance expense bears to group taxable EBITDA). The consultation is open until 4 August 2016, but we do not expect many changes to the key features of the rules.

The new interest barrier rule represents a significant change to the UK’s rules for the deductibility of finance costs. As a result of the introduction of these new rules, it will become more difficult to claim tax relief for financing costs in UK holding companies (and so it is increasingly important to obtain relief for financing costs in local operating companies). Another effect will be to increase the benefits of leverage provided by third party debt as compared with shareholder / related party debt.

 Another set of rules, the anti-hybrid rules, will be introduced from 1 January 2017. These may also act to deny deductions for debt in group structures which involve hybrid entities or instruments. The position will be further complicated by proposed reforms to the carry forward of losses within groups with effect from 1 April 2017. The interaction of all these rules with the new interest barrier rule is considered briefly below.

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