Interest relief tops business tax agenda

Interest relief is set to come under the microscope, an influential tax
research body has said.

Challenges to the UK’s tax treatment of foreign-subsidiary dividends and
controlled foreign companies from the European Court of Justice meant reforms to
interest relief were highly likely, the report, entitled ‘Interest Deductibility
for UK Corporation Tax,’ conducted by the influential Oxford University Centre
for Business Taxation, said.

‘The government is under huge pressure to meet ECJ requirements but still
protect tax revenues. It can either make a fundamental change to the tax system
or patch things up as best it can,’ said Michael Devereux, the tax group’s
director.

Current rules in the UK allow companies to claim back interest paid on debt,
a system which has stimulated growth in private equity industry and created an
attractive environment for foreign businesses to make leveraged UK acquisitions,
such as Ferrovial’s takover of BAA.

Any changes would cause concern for private equity players and
multi-nationals. The European challenge, however, means that the UK could be
pushed into changing this system to protect tax revenues.

The study asked 14 tax advisers from large multinationals about possible
reforms to interest rate relief, and found that most respondents were in favour
of cutting relief on interest rate expense in return for a cut on the tax on
interest. ‘There was some support for a reform which reduced the rate of relief
on interest payments to 15%,’ the report said.