Corporation tax (and business rates) reforms – affecting borrower free cashflows

Banks should consider the following measures when setting interest cover ratios or assessing affordability in new facility agreements, especially for larger corporate borrowers.

  • Carry-forward of loss relief is to be restricted for all companies on an ongoing basis. This will restrict set off of carried forward losses to 50% of profits in an accounting period (after application of in-year losses).  This rule will apply to company profits over £5m p.a. and will come in force from April 2017.
  • Interest deductibility against corporate profits is also to be limited by a 30% EBITDA ratio.  Excess interest will not be tax deductible for the company.  This rule will apply to interest expenses over £2m and will come into force from April 2017.
  • Set against these measures is the continuing reduction in rates of corporation tax, to 17% by 2020.  
  • Loan affordability for smaller businesses trading from physical premises will be enhanced as they are taken out of paying business rates (or pay a lower rate), for many small businesses business rates being the single largest tax cost of operation.

Corporation tax reforms - banks

For banks with pre-2015 losses, such losses can only be used against 25% of the taxable profits.  This rule will come into force from 1 April 2016.

In other words, for banking groups profitable since 2015, at least 75% of profits will be charged to corporation tax at 20% and to bank corporation tax surcharge at 8%, even where historical losses exceed current profits.  Worked example for a bank or building society:


Group taxable profits in 2016/17:   £200m
Carried-forward pre-2105 losses:     £1bn
Max. use of carried forward losses:    £50m
Losses remaining for carry-forward:   £950m


Profits charged to tax and surcharge:   £150m
Corporation tax @20% on £25m:      £5m
Total corporation tax @ 28% on £125m:    £35m
Total corporation tax:    £40m


As already announced, withholding tax at source is abolished from April 2016 on bank and building society interest payments to savers. This is being extended from April 2017 to cover all interest paid via P2P operators and collective investment vehicles. This brings these operators into line with banks and building societies.

Apprenticeship Levy

Large employers, banks and building societies will face a charge of 0.5% on the paybill from 2017. Our discussions with large corporate clients to date indicates that while many have large existing expenditures on internal and external training which could potentially be ‘matched’ with the apprenticeship levy funds, the necessary steps to put businesses in a position to claim such funds have not yet been undertaken.

The DWF tax and employment teams can help businesses in the financial services sector recover this major cost.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Jon Stevens


I am a Partner and specialist tax lawyer with experience of advising on all aspects of tax planning related to corporate and property transactions.