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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation: Apportioned financing cost

Although a majority of banks is expected to accept the appropriate inter-bank bid rate to arrive at a `just and reasonable’ financing cost, the major banks may be able to raise funds at an average below the inter-bank bid rates. To meet this situation Paragraph 3(5) of the 1988 regulations provides that if a bank is able to establish to the satisfaction of an HMRC Officer that in respect of all the loans to which the regulations apply the aggregate of the `just and reasonable’ sums arrived at as in INTM168160 produces an amount in excess of the actual expenditure incurred in financing the loans, then for that chargeable period there shall be taken into account the apportioned financing cost but only if in all the circumstances it is reasonable to adopt the latter figure. In determining the apportioned financing cost of a loan regard is to be had to

  1. the cost to the bank during the chargeable period of obtaining funds for purposes which include the making of loans;
  2. the terms on which the loan was made; and
  3. any other relevant matters.

The wording of the sub-paragraph is deliberately wide so as to permit a bank to raise as relevant such matters as it sees fit. Likewise HMRC is not confined to looking at direct expenditure but may also take into account anything that can reasonably be regarded as part of the bank’s financial costs, such as swap fees etc. No account however should be taken of general administrative costs such as those related to the provision of premises and staff.