Our predictions:

As a member of the EU single market, UK legislation has to comply with our Treaty obligations.  Increasingly, it has become apparent that there are significant failures.  Following defeats, for the UK and other member states, in the ECJ, these failures have been addressed piecemeal.  A particular problem area has been highlighted as a result of claims made by taxpayers.  HMRC has therefore decided to act before the issue is litigated.

The specific issue is the restriction on tax relief where interest is payable between connected persons: broadly, where parties are connected, tax relief is only available if the interest is paid within 12 months of the end of the accounting period.  The problem was that the legislation was targeted at lenders based outside the UK and is thus discriminatory.

In the summer of 2008, HMRC confirmed that they would not apply the legislation as it is currently enacted. A consultation was undertaken to consider alternatives.  Changes are likely to be made from Budget day targeting the restriction at avoidance structures and not non-resident lenders per se.  Not surprisingly, it is likely that the new rules will not eliminate planning opportunities but rather merely complicate structures designed to take advantage of the ability to choose when a company gets tax relief.