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UK Issues COVID-19 Guidance On Interest Expense Deduction Regime

by Jason Gorringe, Tax-News.com, London

03 July 2020


HM Revenue and Customs has released an update to guidance on the UK's interest deduction limitation rules for corporate groups regarding the appointment of a reporting company.

The UK's Corporate Interest Restriction only applies to individual companies or groups of companies that will deduct over GBP2m in net interest or financing costs in a 12-month period.

Under the regime, a company or group must calculate the maximum amount of net interest and financing costs they can deduct in a period of account, using either the "fixed ratio method" or the "group ratio method".

If a company or group's net interest and financing costs are restricted, the taxpayer should generally appoint a reporting company within 12 months of the end of the period of account. They must submit a full Corporate Interest Restriction return.

Using the fixed ratio method, the interest allowance is the lower of:

  • 30 percent of the company's or group's UK taxable profits before interest, taxes, capital allowances and some other tax reliefs; or
  • the company or group's worldwide net interest expense.

To use the alternative group ratio method, the taxpayer must:

  • appoint a reporting company; and
  • elect to use the method in a Corporate Interest Restriction return.

Using the group ratio method, the interest allowance is the lower of:

  • the ratio of the company or group's worldwide net interest expense owed to unrelated parties, to the company or group's overall profit before tax, interest, depreciation, and amortisation, multiplied by the company's or group's taxable UK profits before interest and capital allowances; or
  • the company's or group's worldwide net interest expense owed to unrelated parties.

The reporting company is responsible for submitting their company or group's Corporate Interest Restriction return. A return is required including when there's no interest restriction, until the company revokes the appointment of a reporting company.

Those companies or groups who intend to deduct less than GBP2m may carry forward unused interest allowances for up to five years by filing a full return for the relevant period of account.

Owing to COVID-19, HMRC said it would accept elections by email while temporary measures are in place to stop the spread of COVID-19.

In a July 1, 2020, update to its guidance, HMRC made changes to the process taxpayers should follow if they have missed the deadline for appointing a reporting company. It sets out how companies who missed the deadline to appoint a reporting company owing to COVID-19 may request that HMRC do so instead.

TAGS: tax | interest | corporation tax | United Kingdom | transfer pricing | BEPS

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