In an article in the Daily Mail last year, Charlie Elphicke MP accused utility companies of ‘abusing’ “generous tax reliefs that allow companies to offset debt interest payments against tax”. He called for tax relief on interest payments to group companies to be withdrawn.
Companies do get tax relief for interest – but this is not restricted to large companies. All companies, and indeed sole traders, get tax relief for expenses they need to pay out in earning their profits.
So the owner of a small corner shop, who borrows from the bank to buy stock, gets tax relief in just the same way as the big business that borrows to build a factory.
Where companies are in the same “group” (broadly, owned by the same people) then interest paid by one company can be offset against the profits of another company. This means that the tax bill is the same, whether a group chooses to operate through separate subsidiaries or a single company: again, the same rules would apply to the small businessman, who decides to open a second shop — he could operate as a single company, or as a holding company with one or more subsidiaries.
If interest is paid to an overseas lender – a bank, or a related party – tax relief is still given in the UK, provided the interest is a genuine business expense. The UK has rules to make sure that relief is only given for the amount which could be borrowed from a bank: it is up to HMRC to apply these rules properly. Sometimes, complicated schemes are used which claim to give a UK tax deduction without anyone paying tax on the interest income — again, anti-avoidance rules should make sure that these schemes fail.
So why do people complain? It may be that they do not understand the rules – they are complicated, and are very different from the much simpler rules which apply to employees under PAYE. But the rules should ensure that businesses, both large and small, only get relief for genuine business expenses. If the rules are not being applied properly, then that is a failure by HMRC to operate the system as it was intended – the claim to tax relief should fail.
The final problem is that some people do not agree with current Government policy. That is a valid point of view — but it is an issue which should be debated in Parliament, not hurled as an accusation at companies which invest significant sums in the UK’s infrastructure, and quite properly get tax relief on the costs of financing that expenditure.
Heather Self is a Partner (Non-Lawyer) in international law firm Pinsent Masons LLP. She is the former Group Tax Director of a FTSE 100 energy company, and worked at HMRC on complex disputes with large companies, particularly in the energy and utilities sector. She is a member of the CBI Tax Committee.