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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation: Regulations: SI 1988/88

It should be noted that a bank may not apply the apportioned financing cost approach unless it first demonstrates that the application of the prescribed approach in INTM168160 to all the loans to which the regulations apply produces a figure which exceeds the actual expenditure incurred in financing all those loans. It is not permissible to apply bid rates to some loans and apportioned financing costs to others. The following method should therefore be adopted in applying the regulations

  1. First, loans where the financial expenditure can be specifically identified are dealt with individually: the financial expenditure so identified is deducted from the interest to arrive at the profit on the loan.
  2. Second, the bid rates or other `such amounts’ are applied individually to each of the other loans on a loan by loan basis.
  3. Alternatively, if a bank satisfies HMRC that the aggregate of the sums in (b) exceeds the actual expenditure incurred in financing the loans, then the Inspector and the bank must negotiate how to quantify the financing costs and apportion them on a loan by loan basis.

Whilst generally accepting that loans of the same currency are fungible, HMRC does not accept that all loans in all currencies are fungible. It is therefore expected that where the loans giving rise to the claims to credit relief are made in dollars, then the cost of borrowing dollars will need to be established if a bank is to satisfy the Officer that it is appropriate to adopt the apportioned financing cost method.

Where, in accordance with INTM168075, ICTA88/S798 applies following the transfer of a security, the lender’s financial expenditure to be included by virtue of Section 798(7) will be that relating to the provision or purchase of the security which has been transferred. In all the circumstances described in INTM168075 the amount of the financial expenditure to be deducted from the foreign loan interest will depend on the facts and circumstances of the particular case having regard to the regulations in SI1988/88 (and now see SI1999/3330 - INTM168190) described above.