George Osborne set out in the recent Budget headline grabbing increases to SDLT on commercial property transactions and tweaks in the business rates. An additional proposal and an area which could lead to the increase in tax payable by some companies is the limit of certain tax deductions.
The Budget introduced, from April 2017, a limiting of corporate tax deductions for net interest expenses to 30% of a group’s UK earnings before tax for all UK companies/groups where net interest expenses are above a £2 million de minimis threshold level. Currently, the amount of debt finance that a UK entity can claim interest deductions on for corporation tax purposes is based on an arm’s length basis, which relied on an assessment of each business, and often could lead to deductions of significantly more than 30%. In making this assessment, UK entities were able to count earnings for overseas subsidiaries which will no longer be permitted.
Under current rules, corporation tax losses can be carried forward against certain profits to shelter the payment of corporation tax. It was announced that the amount of profit that can be offset against losses carried forward will be restricted to 50% of the amount of the profits in excess of £5 million. The £5 million is a group wide threshold and the changes will apply from 1 April 2017.
It is difficult to pass any meaningful comment on the full impact of these changes as both will be subject to consultations and so the detail is still to be confirmed, however, on the face of it, for certain companies these changes are going to have the effect of increasing the cost of tax payable. Although, there was the sweetener that corporation tax rates will fall to 17% from April 2020.