I’ve been reading a bit about the claims against Boots using interest deductions to “shift profits”. War on Want say that this has occurred because Boots “has been able to deduct its finance costs from taxable income in its most profitable market.”
I didn’t get past that point in all honesty because I suddenly felt the need to point out something quite obvious.
If you’re going to suggest what Boots might have paid without the interest deduction, you also need to ask yourself how Boots would have performed without the investment into it.
If Boots has been able to legitimately take a deduction for its finance costs, three things follow:
- the interest is being charged at an arms length rate
- the interest is allowable under debt cap rules
- the loan is being used in the UK business
I wanted to focus on the last point simply because it is one of the most fundamental rules on calculating taxable profits.
If the loan were being used only to shift profits, the interest wouldn’t be an allowable deduction for tax purposes. It wouldn’t meet the criteria of CTA 2009, s 54, as per HMRC’s guidance on interest deductions.
The cash provided by the loan is therefore being used. It is being used to pay for all the things that are a part of the trade: paying employees, buying and manufacturing stock, paying overheads, purchasing assets for use in the trade, etc. All those sort of things that are generally considered to be beneficial aspects of business occurring in the UK.
Now, personally, I’d rather have that investment than not have the interest deduction in calculating taxable profits. That interest deduction comes because the capital is being put to use in the UK, in a way that is hopefully beneficial to all.
It seems a fair quid pro quo in principle.
From a quick glance at the Boots story I know there is a bit more to it than interest deductions, which is why this is a more general point here:
Allowable interest deductions do not tax avoidance make.