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<p>The capital structure of a business and the terms of any loan agreements is a commercial
decision for the business and its investors or lenders.</p><p> </p><p>Interest expense
incurred by a business is generally deductible in calculating taxable profits, but
a number of tax rules limit such deductions. These tax rules apply to utilities just
as to other sectors. In particular, transfer pricing rules disallow interest deductions
in excess of what would be paid to an independent lender. And an unallowable purpose
rule prevents deductions for interest on a loan that does not have a commercial purpose.
HMRC robustly enforces these rules to ensure they are applied correctly.</p><p> </p><p>Furthermore,
in line with OECD recommendations and following extensive consultation, the government
is introducing new corporate interest restriction rules in the current Finance Bill
to limit the deductions that a business can obtain for financing costs based on the
amount of its earnings taxable in the UK.</p>
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