Changes to tax rules on late interest payments creates window of opportunity for companies

Monday 11 August 2008

Changes are being made to the corporation tax rules for deducting interest payable to an overseas connected company. What are the changes and could your company obtain a tax advantage?

What are the existing rules?

The existing rules for deducting interest payable to an overseas connected company deny an immediate deduction for interest accrued if the interest is not paid until more than 12 months after the end of the accounting period. Instead such interest is deducted in the period in which it is paid.

What are the changes?

Following recent decisions in the European Court of Justice,  HM Revenue and Customs (HMRC) has accepted the existing rules cannot be maintained and has issued a consultation document to consider how the law should be changed. As interim measure, HMRC has announced that it will cease to apply the existing rules where the creditor company is not UK resident for returns submitted between 28 July (the date after the announcement) and for accounting periods ending before any new legislation is passed.
It is anticipated that any new rules will be included in the Finance Bill 2009 at the earliest. This presents an opportunity to claim deductions that might otherwise have been postponed.

Who can take advantage of this opportunity?

If you are a company that has a loan from an overseas connected company and you are not paying the interest on the loan you should:

• claim a deduction in accounting periods ending before the law changes
• seek to have enquiries closed into deductions that have already been claimed
• consider amending 'open returns' to claim deductions.

Open returns means returns either under enquiry or for which the accounting period ended within the past two years.

As the current proposals are essentially a concession at this stage, taxpayers are not obliged to apply them and should be able to prepare their computations according to the legislation. Those who do not want to accelerate a deduction may therefore continue to claim on a paid basis under the late interest rules until such time as the legislation has been changed.

David Hill, a Client Service Director at Grant Thornton says: "This announcement by HMRC has created a window of opportunity for companies to gain a tax advantage by claiming an appropriate deduction in their tax return. However other opportunities may exist as a result of these interim measures and you should therefore seek professional advice to determine exactly how your company may be affected by the changes."

Please click here to contact us if you would like further advice on any of the above.