Ed Balls said in a speech the other day that the government was not intending to clamp down on interest relief in the UK.
Speaking about private equity deals, he said, and I think the words are important;
There is, of course, nothing specific to private equity in the tax-deductibility of interest. Any kind of company can claim it, and most quoted companies do. It is also the international norm - that interest is in general treated as a business expense and deductible from taxable profits for companies in any form of ownership. We have no plans to review this principle.
'No plans to review this principle' is, of course, a fairly ambiguous phrase.
The coverage of Balls' speech made clear that what the government is interested in is the treatment of debt and equity. i.e. whether equity is being dressed up as debt for tax purposes to cut company tax bills. I don't think that was an unfair reading of his words.
But it was untrue in the broader sweep of government policy. The government has been looking at it as part of its response to ECJ challenges. The taxation of inbound dividends is to be dropped, and interest relief is likely to be restricted to pay for it.
The news has mostly emerged through anonymous briefings, but the government is on the record about it too.
Diane Hay, deputy director of international corporate tax at HM Revenue & Customs, spoke to us the other week as part of our Insider Business Club briefings.
When asked if interest relief was to be cut, she said the following:
If we make things easier, if say we exempt foreign dividends from UK tax then we may well need to look at the possibility of restricting interest. At the moment the UK has some of the most generous interest relief rules in the world. They are significantly more generous than what you would find in Europe and what you may well find in the United States. We basically give 100% reduction to all interest full stop. We don't have interest allocation. These are the things that we have to look at now if we are fundamentally changing the way in which tax overseas income otherwise we may well be faced with a cost of doing this, that the government and ministers find unacceptable.
So, in other words, the government IS reviewing the principle of interest relief (as, in fact, many of us have been reporting for some time).
Now I know Balls wants to look as if he is not giving in to the unions on private equity. But he should get his facts straight before he starts suggesting that such a central plank of the UK corporate tax system is set in stone for years to come.
And private equity funds, multi-nationals, and all those who rely on interest relief rules to plan their tax policies in future years should be aware; those tax breaks are unlikely to last forever.
Recent Comments