Corresponding adjustments revisited – some Government concessions

Following last week’s blog here, there is good and bad news on the vexed issue of corresponding adjustments for individuals. The bad news is that the harsh new restrictions have been introduced with immediate effect from 25th October. The good news is that the Government has listened to some of the arguments made during the consultation and removed a couple of the more punitive elements. 

Although existing arrangements are not “grandfathered”, the removal of corresponding adjustments will not apply to amounts accrued in respect of  periods prior to 25th October 2013. This had been a major concern as interest on junior debt in private equity financed companies often rolls up for several years before payment. 

The other change relates to excess leverage. Interest in excess of the arm’s length amount will be characterised as a dividend for income tax purposes and taxed at the lower income tax rates for dividend income. An individual liable to tax at the additional rate of 45% on general income will pay tax on excess interest at an effective rate of 30.6% rather than the full 45%. This equates the net returns on excess loan finance from individuals with those on equity so, while obviously unwelcome to those who had hoped to take advantage of complete tax exemption, it cannot be described as punitive.

 These changes are sensible and will be welcome. I made the case for them in my earlier blog. 

There is, however, no change to the proposals relating to partnership service companies, so partnerships which have been taking advantage of corresponding adjustments on payments to service companies should ensure that the pricing is brought into line with arm’s length rates to avoid individuals being taxed on amounts for which the service company is denied a deduction. 

A copy of the Technical Note and draft legislation can be found here.

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