UK budget 2017 tax proposals tweak rules on interest deductibility, loss relief, hybrid mismatches

by Julian Feiner, Dentons

As expected, there were no major shocks concerning the taxation of multinationals in UK budget 2017, delivered today, though a few items should be noted.

Altogether, the budget contains about 50 tax policy measures to be legislated from April. It also identifies about 40 tax policy proposals for future consultation.

Interest deductibility

Of particular interest to cross-border business are proposed amendments to the coming UK restrictions on the tax deductibility of corporate interest, due to take effect on 1 April.

The proposed amendments address some of the concerns raised during consultation.

In particular:

• unintended restrictions arising from the modified debt cap that could prevent deductions for carried-forward interest expense will be removed;

• the comparative debt test for public infrastructure will be removed; and

• the rule that treats interest on debt guaranteed by related parties as related party interest will be amended to exclude certain intra-group guarantees.

UK hybrid mismatches

Two changes to the hybrid mismatch regime will be made with effect from 1 January to ease the compliance burden, following extensive discussions with stakeholders.

In particular:

• the requirement to make a formal claim in relation to financial instruments will be removed, due to the high volume of transactions in financial instruments; and

• amortisation deductions will be disregarded when considering whether a relevant deduction has caused a hybrid or other mismatch to bring the rules into line with OECD/G20 base erosion and profit shifting (BEPS) Action 2 recommendations.

Loss relief, overseas lenders

The reforms to carried-forward loss relief, published in draft legislation on 26 January, will be revised to include provisions for oil and gas entities, but will still take effect from 1 April.

Also of interest is a proposal to renew and extend the Double Taxation Treaty Passport scheme to assist foreign lenders and UK borrowers.

The scheme was previously confined to corporate lenders and borrowers; however, from 6 April this restriction will be removed and will now apply to all types of overseas lenders and UK borrowers, with guidance to be published on 6 April.

Future tax consultations

Finally, the budget highlights some of the key areas for consultation in 2017.

These include:

• tackling disguised remuneration avoidance schemes;

• providing a withholding tax exemption for debt traded on a multilateral trading facility; and

• assessing the options to bring non-UK resident companies, which are currently chargeable to income tax and non-resident capital gains tax, within the scope of UK corporation tax.

HMRC will also launch a consultation into its process for risk profiling large businesses, to see how it can promote stronger compliance. This will be released in the summer and run for 12 weeks.

Overall, therefore, UK budget 2017 contains no major tax surprises for multinationals and, in fact, some of the announcements provide a welcome reduction to the compliance burden under proposed legislation.