The proposals come after five months of consultation between HMRC and interested parties.
The legislation would amend the late-interest rule and the similar equivalent rule on deeply discounted securities in the rewritten Corporation Tax Act, which is due to come into effect from April 1 2009.
The previous late-interest rule stated that interest payable by a debtor company to a connected company that remained unpaid 12 months after the end of the accounting period, and corresponding amounts, are not brought into account for tax purposes under the rules on loan relationships.
The proposed change will see the removal of this rule and see the insertion of an anti-avoidance provision that addresses cases of asymmetry between debtor and creditor companies.
“This is a very sensible step,” said Nick Cronkshaw, a partner of Simmons & Simmons in London. “This legislation change is what the majority of groups wanted because they will be given more flexibility on how they pay their interest.
“Obviously, this change will not suit every group but it will allow for each group to come up with their own solution to the legislation,” said Cronkshaw.
One condition for the new rule is that the debtor company is party to an arrangement to secure a deduction for the UK debtor company with no corresponding credit bought in for tax purposes either under the loan relationships rules or under an equivalent foreign tax rule.
In the majority of cases, a debtor company would be allowed a deduction for interest payable to a connected creditor company under normal loan relationships principles.
The consultation on this draft legislation prompted 30 responses from tax professionals who were given two options as how they best felt the rules should be amended.
The first option would have kept the same guidelines. This was widely rejected by the respondents. Few supported it, citing ease of understanding the rules, preserving flexibility, and maintaining certainty for the companies as its only positives.
Respondents welcomed the alternative. They felt the anti-avoidance rule would add a mandatory accruals basis which would restrict the ability of a UK debtor company to defer interest deductions on loans from connected foreign creditors.
An HMRC spokesperson said: “These are minor changes to the tax rules on corporate debt and it corrects a small technical asymmetry in the rules on impairment losses.”
The draft legislation is once again open for consultation, with the findings being passed into Finance Bill 2009 in April.
