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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation - 'Just and reasonable' financing cost

ICTA88/S798B(4) (formerly ICTA88/S798(9)) enables the Commissioners of HM Revenue & Customs to make regulations specifying matters to be taken into account in determining a `just and reasonable’ sum where the financial expenditure is not readily ascertainable. The enabling power providing that `such regulations may make different provisions for different cases’ recognised that it would be necessary to deal with new financial instruments not yet in existence. The regulations cannot override the `just and reasonable’ requirement, but are designed to assist in arriving at a sum which reflects that requirement. The regulations came into force on 29 February 1988 as SI1988/88 (see INTM168180) and were amended, following the 1998 changes, by SI1999/3330 (see INTM168190).

They provide that, where the rate of interest payable on a loan is determined by reference to inter-bank offer rates, the criterion to be taken into account in arriving at such sum as it is `just and reasonable’ to attribute to the financing of the loan will be the corresponding inter-bank bid rate determined after taking into account the same factors used in arriving at the inter-bank offer rate. Therefore where the interest charged on a loan is by reference to London Inter-Bank Offered Rate (‘LIBOR’), the criterion to be taken into account in arriving at the `just and reasonable’ financing cost of the loan will be London Inter-Bank Bid Rate (‘LIBID’).

Where there is no appropriate inter-bank market rate leading to an inter-bank bid rate, or the interest chargeable is determined by reference to a prime rate or base rate, the regulations provide for there to be taken into account such amounts as would, when deducted from the interest payable on the loan in any interest period, provide the bank with a margin no greater than would be usual in the case of loans of that description. It is not thought that such loans form a major part of any bank’s loan portfolio and in practice it is expected to be possible to use LIBID or something similar to arrive at the financial cost. CSTD Business, Assets & International, Base Protection Policy team will assist with any problems in this area.

The inter-bank bid rate applied for any interest period in relation to a particular loan agreement is to be fixed by reference to the rate prevailing on the day on which the inter-bank offer rate is established for that period. HMRC has agreed with the British Bankers Association that where the inter-bank bid rate is not known or not available, a rate of one-eighth of a per cent below the inter-bank offer rate will be accepted as providing the inter-bank bid rate and hence a just and reasonable result. This agreement provides banks with the financial certainty they require while minimising the administrative burden. It is important HMRC fulfils its part of the agreement.