The Covid-19 crisis is likely to result in many UK businesses seeking to raise new debt funding, renegotiate existing facilities and/or reduce the amount of borrowing. It is also likely to give rise to issues around foreign exchange, hedging and impairment. All of these issues are likely to give rise to important tax implications, which will need to be considered. This article seeks to highlight some of these potential tax implications for UK corporates.
Raising new debt funding:
The crisis may result in greater use of loans with ‘equity kickers’ (e.g. ‘convertible’ loan notes or loans with ‘warrants’). Depending on how the transaction is structured, this can give rise to various UK tax issues (e.g. interest being treated as a non-deductible distribution or the borrower being de-grouped from its parent). In addition, where an issuer of a convertible note bifurcates the loan in its accounts, special corporation tax rules can apply to the embedded derivative or equity instrument.
Renegotiating existing funding:
Care will need to be taken to ensure any costs of renegotiating existing facilities are tax deductible for the borrower (e.g. ensuring that any such costs are incurred by, or recharged to, the borrower).
Reduction of debt liabilities:
Foreign exchange, hedging, impairment and corporate interest restriction (CIR):
Given the CIR rules now cap tax relief for finance costs by reference to (a percentage of) a group’s tax-EBITDA, the CIR impact of any changes in the group’s debt and/or EBITDA profile as a result of the crisis will need to be factored into any re-modelling of effective tax rate calculations.
The Covid-19 crisis is likely to result in many UK businesses seeking to raise new debt funding, renegotiate existing facilities and/or reduce the amount of borrowing. It is also likely to give rise to issues around foreign exchange, hedging and impairment. All of these issues are likely to give rise to important tax implications, which will need to be considered. This article seeks to highlight some of these potential tax implications for UK corporates.
Raising new debt funding:
The crisis may result in greater use of loans with ‘equity kickers’ (e.g. ‘convertible’ loan notes or loans with ‘warrants’). Depending on how the transaction is structured, this can give rise to various UK tax issues (e.g. interest being treated as a non-deductible distribution or the borrower being de-grouped from its parent). In addition, where an issuer of a convertible note bifurcates the loan in its accounts, special corporation tax rules can apply to the embedded derivative or equity instrument.
Renegotiating existing funding:
Care will need to be taken to ensure any costs of renegotiating existing facilities are tax deductible for the borrower (e.g. ensuring that any such costs are incurred by, or recharged to, the borrower).
Reduction of debt liabilities:
Foreign exchange, hedging, impairment and corporate interest restriction (CIR):
Given the CIR rules now cap tax relief for finance costs by reference to (a percentage of) a group’s tax-EBITDA, the CIR impact of any changes in the group’s debt and/or EBITDA profile as a result of the crisis will need to be factored into any re-modelling of effective tax rate calculations.