The latest Finance Bill – food for thought and some care needed.
New UK legislation in the Finance Bill 2017 will implement OECD recommendations to restrict the amount of interest that can be deducted for corporation tax purposes from 1 April 2017.
Without special treatment, these restrictions could have a severe impact on some highly capital intensive projects, including many renewable energy and other infrastructure installations.
Below we consider the circumstances for the application of the main exemption from corporate interest restrictions to renewable energy projects.
The draft legislation includes an important exemption named the public benefit infrastructure exemption.
The exemption applies to a number of circumstances, however, we will briefly describe the main rules likely to be of relevance in a renewable energy project.
The exemption applies to a qualifying infrastructure company (QIC) (or to a group of such companies).
For a company to be a QIC it must meet three specific tests, which is:
• A public infrastructure income test
In order to meet the income test, all of the income must derive directly from qualifying infrastructure activities.
• A public infrastructure assets test
Similarly for the assets test the assets must be all tangible assets related to qualifying infrastructure activities.
• A comparative debt test
The comparative test requires that the proportionate debt levels of the QIC (and any associated QICs) are not significantly higher than other companies (non-QIC) in the worldwide group carrying on similar activities.
Qualifying infrastructure activities include the provision of a public infrastructure asset which includes electricity and gas facilities. To qualify, the asset must be
1. a tangible asset forming part of the UK infrastructure,
2. be on the group balance sheet and
3. have an expected economic life of at least ten years
4. as well as meeting a public benefit test.
An asset meets the public benefit test if it is either used in a regulated activity, subject to regulation by a public authority including:
1. the Gas and Electricity Markets Authority,
2. the Office of Nuclear Regulation,
3. the Oil and Gas Authority and
4. the Northern Ireland Authority for Utility Regulation.
The company must also
1. be fully taxable to corporation tax in the UK and
2. must make an election to be treated as a QIC.
If the election is made, interest costs arising to the QIC are not subject to the new corporate interest restriction at all provided that:
1. the creditor is not a related party, and
2. recourse of the creditor is limited to the relevant infrastructure matters
It is possible therefore that renewable energy projects can be structured such that the new restrictions (which will limit deductions for interest for corporation tax purposes), do not apply.
This is perhaps unexpected, as it was thought that such projects would not be capable of so qualifying. However, the exception does not apply to related party debt, and some of the conditions may be difficult to satisfy or inadvertently breached. Careful consideration should be given to funding structures following the introduction of the new rules.
Draft legislation in the Finance Bill 2017 has been published by HMRC and is expected to be enacted Summer 2017.