Schedule 19 Finance Act - Financial Tips

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Schedule 19 of the Finance Act 2020 (applicable to UK Corporation Tax) focuses on reforming the rules relating to interest deductibility for corporate groups. Its primary aim is to limit the amount of tax relief a group can claim on its net interest expense, aligning the UK with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 4 recommendations.

The core mechanism of Schedule 19 is the Fixed Ratio Rule. This rule restricts a group’s deductible net interest expense to 30% of its tax-EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Net interest expense encompasses interest payments, similar financing costs, and amounts economically equivalent to interest, less any interest receipts.

Tax-EBITDA is a crucial component. It is calculated using profits chargeable to corporation tax, with specific additions for deductible interest expense, group relief claimed, and other adjustments detailed within the legislation. This provides a standard measure of profitability against which interest deductibility can be assessed.

While the Fixed Ratio Rule provides a straightforward limitation, Schedule 19 introduces the Group Ratio Rule as an alternative. This rule allows a group to deduct interest expense exceeding the 30% fixed ratio, but only up to the ratio of its net third-party interest expense to its group-EBITDA. Group-EBITDA is a consolidated measure, reflecting the performance of the entire worldwide group, and can be higher than the UK tax-EBITDA. This alternative is particularly beneficial for groups with significant external debt relative to their UK operations.

Groups can elect to use the Group Ratio Rule annually. The election must be made within a specified timeframe and remains in effect unless revoked. Careful consideration is required to determine which rule optimizes a group’s tax position, taking into account factors such as the level of third-party debt, the profitability of the worldwide group compared to its UK operations, and administrative complexities.

Recognizing the varying circumstances of different businesses, Schedule 19 includes several exemptions and de minimis thresholds. A group with net interest expense below £2 million is exempt from these restrictions. Furthermore, there are provisions for public infrastructure companies and for cases involving genuine commercial reasons where exceeding the interest limitation might be justified.

Unrelieved interest expense due to the Fixed Ratio Rule can be carried forward and backward for a specified period (typically five years), providing some flexibility and allowing for deductibility in future years when the group’s profitability improves. Similarly, any excess tax-EBITDA can be carried forward to increase future interest deductibility capacity.

Schedule 19 significantly impacts the tax planning strategies of multinational corporations operating in the UK. It necessitates a thorough understanding of the rules, careful monitoring of interest expense and profitability, and proactive consideration of the optimal interest deductibility approach (Fixed Ratio vs. Group Ratio). Compliance requires robust data collection, accurate calculations, and adherence to reporting requirements. The complexity introduced by Schedule 19 underscores the importance of seeking expert advice to navigate these regulations effectively.