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Interest payments not an allowable business expense

Comment 11th July 2010

Interest payments are currently an allowable business expense which results in lower taxation on funding business by loan capital than by equity.  This often leads to excess excessive gearing.  Taxation should favour equity over loan investment.  At the very least interest should be treated the same as dividends for tax purposes.

This problem was referred to in recent IMF consultation, but no recommendation made.

The incidence of the extra taxation could be relieved by reduction of other taxation on business such as corporation tax or employer's National Insurance.

Why does this matter?

The current system is unfair to equity investment.

It magnifies risk to all stakeholders, not only the company owners.

It discriminates against more ethical investment, e.g. Islamic

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