The Treasury this week threatened to move its attack on multi-national tax arrangements to a restriction of interest relief, potentially hampering foreign companies hoping to carry out big debt-financed takeovers, like the Ferrovial takeover of BAA.

The government said it would drop plans to target ‘passive’ income of companies it feels are set up to divert UK profits. It intends to stick with and improve its model, of targeting each subsidiary one by one, rather than using an income model.

But, as plans go ahead to drop the taxation of inbound dividends, it is looking to stop multi-nationals loading UK companies with debt to wipe out their corporation tax liabilities.

Its discussion document confirmed plans to introduce a ‘debt cap’ to ensure UK debts are not out of line with companies’ global leverage levels. It also promised ‘additional but still limited’ restrictions on interest relief.

‘If you look at the Ferrovial takeover of BAA, it put a lot of debt into the UK,’ said Heather Self, an international tax partner at Grant Thornton, adding that such deals would be affected.

The government fears it could lose as much as £1.1bn from introducing the dividend exemption, due to tax avoidance.