Treasury moves to harm debt-financed takeovers

treasury building

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.

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