Cross-border Debt Financing – Increasing HMRC Scrutiny

The UK restricts corporate tax deductions for interest and similar financing costs through several regimes, including thin capitalisation, hybrid mismatch rules and a fixed ratio cap that generally limits deductions to 30% of UK taxable earnings. The policy objective is to protect the UK tax base by preventing excessive interest deductions.

A recent development is HMRC's greater willingness to deploy an anti-avoidance provision - the "unallowable purpose" rule - to deny deductions for loan relationship debits. HMRC is focused on structures where a UK company appears to have been used simply for the purpose of borrowing money and obtaining UK tax deductions for the interest paid.