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HMRC internal manual

International Manual

The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 3: Determining the equity capital: Tier 2 capital

A number of items fall within this category of capital, including subordinated term debt and convertible subordinated bonds. Both of these will be regarded as ‘loan capital’ for the purposes of CTA09/Part 2/Chapter 4. However, dated preferred shares or perpetual cumulative preferred shares falling within Tier 2 will be regarded as ‘equity capital’.

Tier 2 capital also includes reserves arising from the revaluation of tangible fixed assets and fixed asset investments as well as general provisions. Whilst general provisions are not normally considered to be equity they will not be loan capital. So, to the extent that such reserves or provisions could fall to be included in the Tier 2 capital of a bank under the Financial Services Authority’s capital adequacy directive rules, they may effectively be treated as equity when considering the capital structure of a UK permanent establishment.

In some cases the amount of reserves or provisions included within Tier 2 can be substantial and since they are effectively “equity” rather than debt for the purposes of the legislation, they should not be overlooked.