HMRC about face on tax changes that would have hit early stage businesses and international financing

These original proposals included removing the exemption from withholding tax on interest paid on Eurobonds issued to non-UK group companies which, although listed on a stock exchange, had few if any trades. Removal of this exemption would have had a drastic impact on groups using such funding arrangements, requiring significant restructuring of intra-group debt. 

Other proposals were to abolish the distinction between annual as opposed to ‘short’ interest, effectively removing the right to pay short interest gross, and one that would have hit early stage businesses with little cash flow,  requiring withholding tax on non-cash payment in kind (‘PIK’) notes or ‘funding bonds’ to be remitted to HMRC in cash.

HMRC have announced they have abandoned these core parts of their proposals, publishing a “summary of responses”. 

They will be making a few changes. There’ll be clarification of the obligation to deduct income tax from interest included in compensation payments to individuals, they are acting against structures that avoid withholding by giving a UK source to debt, and they will set out a rule for valuing interest in kind and formalise administrative aspects of funding bonds. 

This will be good news to many businesses. The few that will be affected by the changes as now proposed will need to make changes to systems in advance of the anticipated (but yet to be confirmed) start date of 1 April 2013.