International debt capping rules come into force

Introduced as part of a wider package of rules governing the taxation of foreign profits, the Treasury’s recently introduced worldwide debt cap regulations limit the tax deduction for interest and other finance expense of UK companies in large groups to the external interest and other financial expense of the overall group. The rules are effective for accounting periods starting on or after 1 January 2010.

With the rules now in force, it’s important for companies to ascertain whether they are likely to be affected by the legislation and, if possible, take action to reduce the impact.

The good news is that the legislation is not aimed at small and medium-sized groups – as defined by the relevant European Commission Recommendation – and there are other exceptions for large groups via a series of ‘gateway tests’. However, those groups that are large enough to fall within the scope of the legislation will need to prepare the necessary calculations to see if they are excluded under the gateway tests. If they fail the tests, they will need to compute the appropriate disallowance for corporation tax purposes. In the case of some large groups, the calculations could be extremely onerous.

Those groups that do face capping under the new rules may want to consider restructuring their borrowing. Essentially, this would mean reducing the level of UK debt.

This too could be a complex undertaking and groups that fear they may be hit by the change in rules should seek help from a specialist advisor.