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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: returns and reports: enquiries by FICO - form 4450/I part 2

Part 2 of the form has questions designed to indicate whether, because of a group relationship or other situation, the amount of interest paid may be influenced other than by commercial considerations.

Interest may be payable at a fixed or floating rate. Intra-group agreements can be vague on the interest rate to be used, sometimes even leaving it to the lender’s discretion or `to be agreed’. Clearance cannot be given on such a basis. A specific formula or fixed rate appropriate to the length of the loan, type of finance, etc. needs to be agreed.

Fixed rate loans are normally for fixed periods, and the rate will depend upon the currency of the loan, its length, and the creditworthiness of the borrower. It is often worth asking how connected parties determined a fixed rate.

Floating rates are usually expressed as a percentage margin over a market rate such as LIBOR or a bank’s base rate for the relevant currency. International Division 4/5, Melbourne House have access to a database of interest rates and can advise if necessary.

If the United Kingdom borrower has bank borrowings, the terms of these may provide a useful comparable.

Sometimes the borrowing is from a bank, etc., but the amount has been influenced by a guarantee given by an overseas parent. The influence can also be by way of a letter of comfort or a letter of awareness. International Division 4/5, Melbourne House would like to see any cases where excessive finance seems to have been obtained by such means.

A loan agreement may refer to a `collateral’ or `security’ agreement. This should be followed up and the other document obtained. This may reveal a back to back arrangement (see ITH1228). The fact that a large bank loan is apparently unsecured may also be a sign of such an arrangement. Since April 1996 we can use the loan relationship provisions at FA96/SCH9/PARA13, to challenge this, but the use of these is monitored centrally. Consequently International Division 5/2, Melbourne House need to see all such cases before a challenge is mounted.

The facility is only likely to be connected with a United Kingdom permanent establishment if the lender has a United Kingdom branch or where the loan or facility was effectively negotiated by a United Kingdom affiliate.