Since being introduced, criticism has been levelled at the Worldwide Debt Cap rules because of their complexity and the ambiguity that has been encountered in practice. These rules target excessive intra-group debt being borne by UK companies and are being amended to provide groups with more flexibility and clarity in applying them.

Baker Tilly analysis

The Worldwide Debt Cap (WDC) rules are difficult and complex to apply in practice and are considered to be relatively inflexible in their current form. Instances of unintended ambiguity have also arisen by virtue of how these rules are currently drafted.

The proposed amendments included in the draft finance bill typically fall within two categories and relate to changes to:

• reduce ambiguity and provide further clarity where required;
• provide groups with more flexibility in applying the rules.

Companies are likely to be interested in the opportunity to minimise their tax compliance burden, by utilising the flexibility afforded in the proposals.

In detail

Of most interest will be the possibility to elect out of certain provisions which are used to calculate any non-deductible UK finance expenses. The reason for introducing this election is that, surprisingly, the current de minimis rule (whereby amounts under £500,000 are ignored), could be detrimental to groups in certain circumstances.

The proposed change will allow groups to make a revocable election to suit their needs; e.g. it may be beneficial to include small amounts of finance income in the calculation if this reduces the potential restriction of finance expenses elsewhere in the group. The making or withdrawal of the election will need to be made within 12 months of the end of the relevant accounting period.

In addition, it has been confirmed that the WDC rules will not apply unless a group is ‘large’ throughout an accounting period, so that where a group becomes or ceases to be ‘large’ during a period, the rules will not apply for that period.

On a cautionary note, a new anti-avoidance provision is to be introduced to prevent exploitation of the definition of ‘worldwide group’. This provision will apply where large groups enter into schemes where one of the main purposes is to avoid the WDC rules by failing one or more of the conditions.

Other minor changes include:

• refining the definition of dormant companies;
• refining the way in which finance expenses and finance income are apportioned in certain circumstances;
• incorporating powers to make future amendments to deal with changes in accounting standards.

In summary, any attempt at improving these rules should be welcomed and these proposals appear to be a step in the right direction.