Originally published in the Dorsey London Tax Update, September 12 2008
Revenue & Customs Brief 33/08 (28 July 08) announced a consultation on changes to the corporate tax rules on late payment of interest between connected companies. The previous interpretation of HMRC of para 2(1A) Sch 9 FA 96 was that interest paid in excess of 12 months after the end of the accounting period in which it would be treated as accruing is accounted for on a cash basis if paid to a non UK resident but remains on an accruals basis if paid to a UK resident.
HMRC seem to acknowledge that that interpretation of the rules may be considered contrary to the EC freedoms in light of recent ECJ case law and for that reason they seek to amend the law in order to put the point beyond doubt. The consultation is ongoing and until there is any amendment or new legislation, HMRC have said that they will not apply paragraph 2(1A) Sch 9 FA 96 to corporate tax return computations submitted on or after the date of Revenue & Customs Brief 33/08 or to any other accounting periods ending before the law is amended, in cases where the creditor company is not resident in the UK. HMRC have also said that, in such cases where enquiries into returns are currently open, the application of paragraph 2(1A) will not be pursued.
The effect of this would seem to be that where you fit within the rules for connected companies and your years are open you may now account for late paid interest either on an accruals or a cash basis.
This seeming admission gives opportunities to claimants where:
(1) interest was paid late because of difficulties in obtaining treaty clearance or by reason of negotiations with HMRC;
(2) a portion of interest was not paid at all because it would have been disallowed;
(3) debt was converted to equity to meet thin cap requirements by changing interest bearing loans to interest free.
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