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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 5: Determining the capital attribution tax adjustment: Disallowance of interest and other costs

A UK branch of a foreign bank is funded by its head office with:

  • short terms loans of £800m at an interest cost of 5%
  • a ten year loan of £25m at an interest cost of 7%, and
  • an interest-free allotment of capital of £75m.

Assumptions:

  1. The analysis under CTA09/Part 2/Chapter 4 requires the branch to have equity capital of £150m and loan capital of £50m. Therefore, £200m of the actual funding is to be treated as displaced by the attributed equity and loan capital for the purposes of computing the costs to be disallowed under CTA09/Part 2/Chapter 4.
  2. The appropriate interest rate for attributed loan capital is agreed at 6%.
  3. The funding to be displaced by the attributed equity and loan capital is agreed as the £75m allotted equity, £25m ten-year loan and £100m of the short-term loans.

The attributed capital and its cost will be:

Type of capital Amount of capital Interest rate Cost
       
Equity capital £150M 0%  
Loan capital £50M 6% £3.0M
    Total £3.0M

The funding that will be displaced by the capital will be:

Type of funding Amount of funding Interest rate Cost
       
Allotted capital £75M 0%  
10-year loan £25M 7% £1.75M
Short-term loan £100M 5% £5.0M
    Total £6.75M

Therefore, the costs to be disallowed under CTA09/Part 2/Chapter 4 as the capital attribution tax adjustment are £6.75m - £3.0m = £3.75m