Preserving generous tax rules is key UK concern

Preserving Britain's generous tax treatment of interest costs has emerged as the top concern of large companies as they contemplate possible changes under the next government.

Businesses view keeping the rules on the tax deductibility of interest costs as more important than maintaining the 20 per cent corporate tax rate or cutting employment taxes, according to a survey.

The poll by Tolley Tax Journal detected widespread support for the coalition government's tax-cutting policies. Nine out of 10 of the 75 companies that took part agreed that the government had succeeded in its flagship policy of creating "the most competitive corporate tax regime in the G20".

Nearly all the companies polled said the treatment of interest deductions was important for UK tax competitiveness, with 72 per cent saying it was "very important".

The rules allowing companies to deduct interest payments from their tax bills are flexible by international standards. They have been criticised for allowing companies to shift profits to lower-tax countries although there are already rules, known as the "worldwide debt cap", that limit profit shifting using excessive debt.

More than six out of 10 respondents thought the cut in the corporate tax rate by 8 points to 20 per cent had boosted their own companies' investment and growth, although for most it only had a marginal impact.

The poll highlighted criticism of last month's introduction of the diverted profits tax, which penalises companies that shift profits to low-tax countries. About seven out of 10 respondents said it undermined UK tax competitiveness, with some fearing double taxation, unpredictability and complexity if other countries followed suit.

One respondent said the government was "playing politics" with the diverted profits tax. "[It] seems to want to play the political card at the risk of undermining UK competitive tax regime."

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Nervousness about potential changes to the tax treatment of interest has been provoked by an international overhaul of corporate tax rules due to be completed in September. Respondents were sceptical about whether the initiative organised by the Paris-based Organisation for Economic Co-operation and Development would meet its stated aims, with 55 per cent saying it would not.

The Liberal Democrats have announced they would implement whatever restrictions on interest deductibility are put forward by the OECD, which the party thought might raise as much £740m a year.

The Institute for Fiscal Studies, an independent think-tank, said it was unclear whether the new policy would supplement or replace current rules. It said: "There is no guarantee that implementing the proposals would be the best option, especially unilaterally, and certainly no guarantee that doing so would raise £740m per year."

Heather Self, partner of Pinsent Masons, international law firm, said: "It is not surprising that interest deductibility is such a concern for survey respondents as there is a real risk that the OECD's cure could be worse than the problem. The initial discussion proposals we have seen to date look likely to involve onerous compliance burdens and in many cases will lead to double tax."

New restrictions on interest deductibility would be a particular concern for infrastructure projects, which tend to be highly geared. More than six of 10 of the companies polled said the tax system did not adequately support infrastructure investment.

One respondent said: "UK's infrastructure requires many, many billions of pounds spent on it. Tax policy needs to reflect this . . . if this country wishes to avoid the chaos that an inadequate infrastructure will create."

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