Connected company interest payable

New rules on the tax deductibility of ‘late paid’ interest between connected companies were announced in the Budget. These are to replace the existing rules which were largely suspended for payments between connected companies in July 2008 when HMRC acknowledged that the ‘late paid rule’ may have contravened EC Treaty freedoms.

Baker Tilly analysis

This change is generally welcomed by the business community as a practical and workable solution which should not result in unacceptable tax leakage for HMRC. Whilst this was a necessary piece of housekeeping, it will only affect companies with overseas associated companies.

In detail

Prior to the July 2008 announcement, the ‘late paid’ rules for interest payable by a company to connected persons meant that a tax deduction is deferred until the period in which it is paid unless it is paid no later than 12 months after the accounting period end in which the interest is charged in the paying company’s accounts. These rules continue unchanged throughout where the connected person is a non corporate.

Broadly two companies are ‘connected’ under the loan relationships rules if one controls the other, or they are both under common control. This will include companies in the same group as well as companies under the control of the same non corporate entity.

The new rules will mean a tax deduction would be available for the connected company interest charged in a company’s accounts unless the interest is payable to a connected company which is resident in a ‘non qualifying territory’. A non qualifying territory is a country with which the UK does not have a Double Tax Treaty which includes a non discrimination Article. This will generally mean ‘tax haven’ countries. The ‘old’ rules will continue to apply for interest payable to a connected company resident in a ‘non qualifying territory’.

The new rules are to apply to a company’s accounting periods commencing from 1 April 2009 but a company may elect for the paid basis to continue for the first accounting period to which the new rules would otherwise apply.

These new rules on deductibility are to apply equally to discounts on deeply discounted securities as they apply to interest payments.

For the interim period between July 2008 and the introduction of the new rules companies are generally able to claim a deduction for connected company interest on a payable basis for accounting periods for which the tax returns are in time to be amended.