The mother of all tax rows

The fact that UK companies can deduct interest payments against their
corporation tax bill is coming under attack from several quarters.

Some argue it hands an unfair advantage to foreign acquisitors to load UK
subsidiaries with debt and offset profits.

A cursory glance at Nestle’s UK subsidiary, which has in recent years turned
over around £2bn and made hardly a penny of taxable profit, certainly suggests
the UK may be missing out on something.

But more importantly, the challenge of the European Court of Justice has
encouraged policymakers to discuss dropping the advantage. If multi-nationals
are to get huge rebates from the ECJ, they are going to be denied interest
relief to make up the shortfall, the argument goes.

Though critics say that the move would alienate multi-nationals, it might not
be such a bad idea to question whether the dogmatic defences of ‘inward
investment’ is healthy.

What about tax advantages for UK businesses and UK entrepreneurs? Why don’t
they ever get a look-in in those debates?

Any move to limit the relief makes the business models of a host of foreign
purchasers, like Ferrovial and BAA, as well as the huge private equity industry,
look much tougher.

With the huge indebtedness of corporates beginning to pinch, the moves would
exacerbate corporate insolvency issues.

Offshore bank accounts, tax credits and general avoidance will dominate much
of HM Revenue & Customs’ agenda this year. But interest relief changes would
provoke a whole different order of tax row.

Alex Hawkes is the news editor of Accountancy Age

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