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HMRC internal manual

Double Taxation Relief Manual

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HM Revenue & Customs
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Non-residents: UK income: returns and reports: enquiries by FICO - form 4450/I part 1

Part 1 of form 4450/1 deals with basic details of the loan under consideration. Check that the borrower and lender shown here are the same as the parties named in the loan agreement. Investigate any discrepancies, and attach a note of explanation to the otherwise completed form.

Some intra-group agreements may not specify the amount of the loan or the upper limit if it is a facility. This would not happen at arm’s length. In such cases you will need to find out how much has been borrowed, and how much it is planned to borrow. Thin capitalisation needs to be considered on the basis of known or maximum future debt, and FICO (International) can only issue clearance notices with reference to a set amount or ceiling.

The date of the loan agreement is significant because there are strict time limits for claims within ITSA. In addition authority to pay gross or at a reduced rate of withholding tax in accordance with the relevant double taxation agreement is not necessarily retrospective back to the date that the loan started.

Retrospective authority to pay interest gross or at a reduced rate of withholding tax will only go back to the date that the application was received by FICO (International). If payments of interest were made before then without deducting the full domestic rate of Income Tax, then even if clearance is given in full there may well be a liability to TMA70/S87,interest. More guidance is given in Tax Bulletin issue 12J, and if you suspect that interest may have been paid without deduction of Income Tax at the full domestic rate before a certified claim was received, you should address any TMA70/S87, interest consequences immediately rather than after an exemption notice has been issued.

Some intra-group documentation may not specify when the borrowing is to be repaid, either through omission or because the loan is repayable on demand. Alternatively a very long period may be specified. At arm’s length `repayable on demand’ terms are generally subject to review by the lender at a certain date. You should follow that approach in arriving at the date to go in here, since clearance will only be given for a finite period.

In deciding what period would be appropriate, take into account all the circumstances, but particularly the purpose of the borrowing. For general working capital, up to five years would be reasonable. Longer might be appropriate if the debt is for a specific investment or asset- related purpose, but look at such claims carefully.

Remember that a loan may have been deliberately structured to have no repayment date, in which case the equity note legislation may be relevant. See CT1552, ITH1249 - ITH1251, and Tax Bulletin issue 7E for guidance on the application of ICTA88/S209 (2)(e)(vii).