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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Debt cap: interaction with other rules: transfer pricing


ICTA88/SCH28AA/PARA5(9) - introduced by FA09/SCH15/PARA96 - provides that the transfer pricing rules in ICTA88/SCH28AA apply before the debt cap.

ICTA88/SCH28AA operates to substitute the arm’s length provision for the actual provision for tax purposes where:

  • one party to the provision controls the other, or both are controlled by the same person
  • the actual provision differs from the arm’s length provision; and
  • the actual provision confers a UK tax advantage on one or both of them.

ICTA88/SCH28AA/PARA5 provides that there is a potential advantage in relation to UK taxation if, disregarding the effect of ICTA88/SCH28AA, a person’s taxable profits for a chargeable period are reduced, or losses, expenses of management or group relief are increased as a result of non arm’s length price. This means that, in general, the question of whether the transfer pricing rules will apply can be decided only after all other adjustments required by the Taxes Acts have been made.

However, the amendment to ICTA88/SCH28AA/PARA5 ensures that ICTA88/SCH28AA applies before the debt cap and in this sense ICTA88/SCH28AA has primacy. The rules therefore require that the arm’s length price for a provision is established and that it is the arm’s length amount (if it is a finance expense or finance income amount) that is taken into account in performing the debt cap calculations.


A relevant UK company (company A) pays £1 million interest to its US parent, company B. The US parent pays £700,000 interest to a bank. There are no other payments of interest by group companies.

Following a thin capitalisation enquiry, HMRC and the group agree that the arm’s length amount of interest payable by A to B is £750,000.

The group makes a claim for a corresponding adjustment under the UK/US Double Taxation Agreement to reduce the amount of interest taxed on B to £750,000. This is agreed by the US Internal Revenue Service as the adjustment to A’s profits were made under Article 9 (associated enterprises article).

For the debt cap calculations, the tested expense amount is the £750,000 that is deductible after the operation of Sch 28AA. The available amount is £700,000. Company A is denied a further deduction of £50,000. The group cannot make a claim for a corresponding adjustment under the UK/US DTA in respect of this adjustment as the adjustment was not made under Article 9.

Advance Thin Capitalisation Agreements (ATCAs)

ATCAs will still be very important for both groups and HMRC as they will ensure a framework for agreeing the arm’s length price in respect of cross-border intra-group debt. The explanation above applies equally to thin capitalisation aspects of transfer pricing, so it is the adjusted amount, after any disallowance arising from the terms of the ATCA, which will be taken into account in performing the debt cap calculations.