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Beginning on 1 April 2017, there is a potential restriction on the amount of loan interest that can be deducted for tax purposes in corporate groups.

In broad terms, the amount of deductible interest is restricted to 30% of its taxable earnings before interest, taxes, depreciation and amortisation (known as "EBITDA"). There are other optional calculations available, which may or may not be advantageous, depending on the circumstances, and there is no restriction at all for groups with interest costs of £2 million or less for a period of account. Unused interest capacity may be carried forward for, broadly, five years; and interest for which deductions are denied may be carried forward indefinitely.

Importantly, where a group has interest payable of over £2 million, and there is a restriction, then it is required to file an Interest Restriction Return in order to allocate the restriction around the group as it sees fit.

There has been some correspondence with HM Revenue & Customs (HMRC) in relation to the implications for charities. If HMRC is correct, this will impact charities with interest costs of more than £2million a year, and Registered Providers are likely to be particularly affected. Although it is unlikely that they will suffer a corporation tax charge, nevertheless they will be required to file the return mentioned above, and allocate any interest restriction to the charity (up to the amount of the charity's net interest expense) where it will have no tax effect. The Return must be filed within 12 months of the end of each accounting period.

The issue arises because it had been assumed that interest paid by charities did not count towards the £2million figure. So if a charity had an annual interest cost of, say, £5 million it would not suffer a restriction; and if the external interest paid by its noncharitable group companies was below £2 million the restriction could not apply.

However, HMRC's view is that interest paid by charities cannot be ignored for the purpose of the restriction rules, so the Return will be required.

This appears to be an unforeseen or unintended consequence of the legislation, since there is no tax advantage for HMRC, but the safest course of action would be for charity groups to allocate any interest restriction to the charity and file an Interest Restriction Return.