26.5.2025 | Tax

On the surface, a cut in interest rates should encourage business investment.

For capital-intensive industries like shipping and freight, where large infrastructure and fleet investments are common, it could provide the ideal opportunity to reassess financing arrangements, refinance existing debt or bring forward expansion plans in automation and sustainability initiatives.

After all, even modest improvements in loan terms can result in significant long-term savings, especially for firms with high working capital requirements or long lead-time investments.

The downside of lower returns

But while borrowers benefit, cash-rich businesses face different challenges. Lower interest rates mean reduced returns on reserves and surplus cash, which can affect profitability for firms with significant liquidity on their balance sheet.

This is especially relevant for port operators or logistics companies holding large cash deposits for capital projects, insurance requirements, or seasonal fluctuations.

Corporation Tax

Even with the current reduction, interest rates are still substantially higher than they were a few years ago. In some cases, these interest earnings may now generate substantial tax liabilities, requiring proactive planning.

A hidden VAT pitfall

One lesser-known consequence of increased interest income is the potential impact on VAT recovery. Interest income, such as bank interest, is exempt from VAT – and if it accounts for more than 1% of turnover, it can reduce the proportion of input VAT a business can reclaim.

While this issue is more commonly seen in professional services firms like solicitors, it can also trip up businesses in the shipping and logistics sector – particularly those holding large cash reserves or earning notable interest returns on deposits.

This erosion of VAT recovery can be slow and subtle, but it may have a serious impact on cost management. Therefore, it’s essential to monitor closely and seek advice if thresholds are being approached.

Strategic planning in a shifting landscape

Depending on your business’s cash position, borrowing needs, or investment plans, the right strategy could involve:

• Reviewing financing terms to capitalise on cheaper borrowing
• Reassessing the tax impact of interest income on cash reserves
• Monitoring VAT partial exemption risks linked to interest income
• Exploring opportunities to redeploy excess liquidity more efficiently

At Beatons, we’re helping clients across the sector make sense of the numbers — and use them as a springboard for smarter business decisions.

If you could use some expert advice on the best strategy, please get in touch.