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What the new corporate interest expense rules mean for you

29th March 2017

The Finance Bill 2017, published on 20 March 2017, contains the proposed legislation which introduces new potential restrictions on interest expense for UK corporation tax payers.  These rules form part of the UK Government’s implementation of the recommendations from the Base Erosion and Profit Shifting (‘BEPS’) programme being carried out with over 100 countries to tackle profit shifting to lower (or no) tax jurisdictions.

The legislation is extremely complicated and now runs to 156 pages!  It has already undergone two significant changes with the Finance Bill reflecting the amendments, including correcting structural flaws, announced in Budget 2017.  However, further changes may still arise before the legislation receives Royal Assent and becomes law, which is not expected before July.

The restriction

The new rules are effective from 1 April 2017 and will apply to groups (as defined in International Accounting Standards) or standalone companies whose net interest expense in the UK exceeds £2 million.  For these purposes, net interest expense is wider than just interest expense less interest income and is derived from tax principles.

The rules will, broadly, apply by restricting the interest deduction available for the UK companies within a worldwide group to the higher of the following amounts:

  1. The Fixed Ratio Rule:  The lower of 30% of the UK group’s tax EBITDA and a debt cap based on the interest expense in the consolidated group accounts;
  2. the Group Ratio Rule:  The lower of the proportion of the UK group’s tax EBITDA, using a ratio based on the worldwide group ratio of external net interest, to EBITDA using the consolidated group accounts and a debt cap based on the third party interest expense in the consolidated group accounts; and
  3. the de minimis amount:  A de minimis limit of £2 million per annum for each group.

The UK group’s tax EBITDA is based on the aggregate of the taxable profits/losses of the group companies subject to UK corporation tax after adding back adjustments for interest, capital allowances, amortisation and various tax reliefs.

The debt caps that apply in the Fixed Ratio Rule and the Group Ratio Rule include rules to reduce timing issues following changes made in Finance Bill 2017.  The intention of these changes was to correct a structural flaw that could have prevented many UK groups from ever getting tax relief for their interest expense in loss making periods.  However, it is possible that we will see further refinement during the Committee Stage because, as currently drafted, the complete correction of the flaw does not seem to have been achieved.

The Group Ratio Rule, which requires electing into on an annual basis, should ensure that many profitable, wholly domestic, UK groups or companies will not suffer any significant interest restriction if there is little difference between their tax and accounting EBITDA.  However, those heavily funded by related party debt, or with fluctuating profits, could be impacted more significantly.  The Group Ratio Rule allows for alternative calculations and a one-off election to be made to address the mismatch between tax and accounting adjustments.  These may be helpful for some groups but will depend on the specific circumstances which will require careful analysis and consideration.

Interest that is disallowed in a period is not necessarily lost forever, as it can be carried forward indefinitely for relief in later periods where spare interest capacity exists.  Spare interest capacity can also be carried forward, but only for up to five years.

The position is likely to be more complicated for UK companies within a worldwide group, particularly for those with an overseas parent who prepare their accounts under different overseas accounting principles.  In such cases, professional advice should be sought to consider the impact of the new rules.


The impact of the new rules can best be illustrated by the following example.  A worldwide group, which includes UK companies, has the following results for the years ended 31 March 2018 and 2019:

  2018 2019
Tax EBITDA of UK companies £10m £12m
Net interest expense in UK £4m £4m
Group interest £5m £6m
Accounting EBITDA of worldwide group £20m £12m
Group ratio 25% 50%
The interest deduction available for each period under the different methods are as follows:
  2018 2019

Fixed Ratio Rule

30% of tax EBITDA





Group Ratio Rule

Group ratio x tax EBITDA





De minimis limit

Deduction available





In this situation, the group would use the Fixed Ratio Rule for the yearended 31 March 2018 but elect to use the Group Ratio Rule for the year ended 31 March 2019 as this gives a better outcome.  The net interest expense available for deduction in each year is as follows:
  2018 2019

Allowable net interest



Disallowed net interest



In the year ended 31 March 2019, the UK companies have spare capacity of £2m as the deduction calculated under the Group Ratio Rule of £6m exceeds the net interest expense of £4m arising in the year.  Deduction for the £1m of net interest expense disallowed in the year ended 31 March 2018 will therefore be allowed in the year ended 31 March 2019.  The remaining spare capacity, of £1m, can be carried forward for up to 5 years.

Accordingly, the total interest deduction available to the UK companies for each year is as follows:

  2018 2019

Total interest deduction available


Property investment companies

In response to feedback from the earlier consultations, the new rules include an important elective exemption for companies meeting a public benefit test.  Perhaps surprisingly, this public benefit test includes rental properties let on short term leases (under 50 years) to third parties, presumably, to address the particular vulnerability of the highly geared real estate sector to the new regime.

This exemption is welcome and should enable some pure property investment groups to avoid any interest restriction under the new rules.  The detailed conditions, including the exclusion of any related party interest from the exemption, will however still stop many property groups from being able to properly benefit from this exemption, despite the relaxation of some of the rules in Budget 2017.

Other considerations

Additional work arises for groups and companies with accounting periods straddling 1 April 2017 as figures will be required for the periods before and after this date.

The new regime contains considerable reporting requirements, including for those without any restriction, which will place an additional administration burden on UK companies.  In addition, the new rules may impact the deferred tax recognised on the disallowed interest in the accounts.

Any UK companies with significant losses will also need to model the impact in conjunction with the new rules restricting the use of losses above £5 million, which are also contained in Finance Bill 2017.

The new legislation also includes specific provisions for REITs but, in practice, it is unlikely that many REITs will be affected by the rules.

Finally, it may not be long before non-resident companies need to consider the new interest relief rules with the Government exploring whether to bring such companies within the scope of corporation tax.  If this happens it will bring such companies within the new rules for corporate interest and loss restrictions.  A consultation was published on this issue on 20 March 2017 but it included no mention of a specific time frame for introducing any such rules.


Whilst the £2 million de minimis threshold will exclude many UK companies from the new regime, it is clear that the legislation will impact more companies than originally anticipated.  In particular, wholly domestic UK groups may be affected and, at the very least, need to assess the potential impact of the new rules.  Rather than reflecting the law of unintended consequences of implementing the BEPS programme, the more cynical might regard this as a covert revenue raiser by the Government (expected to be around £1 billion per annum).

Companies with UK (group) net interest above the de minimus threshold should consider the impact of the new rules on their forecasts and consider whether any elections or exemptions will be useful in planning for any restrictions that might arise.  Those affected should consider what remedial action might be available, such as reviewing the financing arrangements in place including the use of related party debt and the timing of any interest payments.

With the new rules on corporate interest restrictions coming into effect from 1 April 2017, there is very little time for groups to plan, especially given their complexity.  

UK companies and groups with net interest over £2m should obtain expert advice about the potential impact of these rules on their business as soon as possible.

Update as of 26 April 2017:

The announcement of a General Election on 8 June and the imminent dissolution of the current Parliament means that the Finance Bill, as originally published on 20 March last, will now be passed in a slimmed down form (utilising a truncated Parliamentary process known as the wash-up).

A number of technical measures have been dropped including those providing for restrictions on interest expense for UK corporation tax payers as outlined in our bulletin of 30 March 2017.

The wash up period at the end of a Parliament allows the Government to get on the statute books essential or non-controversial legislation which would not otherwise complete its passage through Parliament because of the dissolution.

Although the clauses dealing with corporate interest restrictions have been dropped in order to facilitate the wash-up it is highly probable that they will be re-laid in a further Finance Bill to be introduced after the General Election.

Please contact your usual haysmacintyre advisor, or our Head of Tax Katharine Arthur, if you require assistance.