TAX COSTS
FORTHCOMING
CHANGES WILL LEAD TO INCREASED TAX COSTS
Kate Mitchell from PwC provides an update on two key developments in UK corporation tax set to come into force from 1 April 2017…
SLOWER RELIEF FOR EXCESS LOSSES
The first key development relates to the way in which corporate tax losses can be utilised against profits. An unwelcome aspect is that, subject to a £5 million de minimis, it will only be possible to utilise losses carried forward from a previous period against a maximum of 50% of profits.
Companies constructing significant capex projects, where excess tax losses tend to be generated in the early years through significant capital allowance claims, are likely to find they are paying tax much sooner than under the old rules. Whilst another aspect of the changes is that there will be more flexibility in terms of which type of taxable profits losses can be used against, this is a relatively minor, though still welcome, change.
INTEREST DEDUCTIONS CAPPED AT 30%
The second key development, which has been prompted by the OECD’s work on cross-border tax avoidance, relates to tax relief on interest. Broadly, the headline restriction is that the amount of tax relief available for interest (and similar finance costs) in UK companies will be capped at 30% of (tax adjusted) EBITDA. In what is likely to be a highly complex set
of rules (no draft legislation has yet been issued), further tests have been put forward that could either increase or reduce this 30% restriction in certain circumstances, and proposals that deal with both excess interest and excess capacity. Whilst these rules are targeted at larger businesses (it is thought that 95% of businesses will be outside the rules as there is a £2 million de minimis), again it is likely that these rules could significantly impact the return on large infrastructure investments. There is a little hope that renewables
projects may be able to take advantage of a ‘public benefit infrastructure exemption’, which would see more generous tax relief given for interest on such projects that are typically highly geared. However, as currently proposed, it appears that this exemption is likely to be too narrowly drawn to help.
BE PREPARED – ACT NOW
As we have draft legislation in respect of the rules on losses, businesses can, and should, be assessing the likely impact of the rules on their tax position, in particular, because there may be action that can be taken in respect of prior year computations that could mitigate any adverse impact. The position is far less clear in relation
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to interest deductibility. With no draft legislation and some speculation that the introduction of the rules may be delayed, it is more difficult to do a full assessment, though the direction of travel in the consultation paper is clear. In either case, we continue to encourage businesses to act now to try understand the likely impact of the proposed rules, rather than waiting until they come into force.
Kate Mitchell PwC
MORE INFO
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TO SEE THE FEATURES IN THE UPCOMING EDITIONS
COMMUNICATION HUB FOR THE WIND ENERGY INDUSTRY
www.windenergynetwork.co.uk
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