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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: the main thin capitalisation legislation: Borrowing capacity - the borrowing unit

2004 changes to the borrowing unit

Before 1 April 2004, the borrowing unit for thin cap purposes - see INTM413070 - was defined by statute at ICTA88/S209(8A). It consisted of the ultimate UK parent company of the borrower and all its 51 per cent subsidiaries, wherever situated. It did not matter whether the borrower was the ultimate UK parent or a subsidiary of it. However, if there were in the UK other members of the global group, such as single companies held directly from overseas, or other “parallel” UK sub-groups, These were excluded from the borrowing unit. There was no means by which the borrower could obtain the benefit of any spare borrowing capacity which lay within such companies. This meant that if a US-owned group had three European trading divisions, each headed by different UK parent companies, each of which was owned directly by the US, then each of those sub-groups of the US parent would have to be considered separately with no set-off entitlement between them. Potentially there might be two thinly-capitalised sub-groups and one heavily-capitalised sub-group, but under the old rules there would have been no scope for consolidation or possibility of set-off of any kind between them.

Compared to this, the possibility of compensating tax adjustments for the lender or for guarantors, as provided for under post-2004 legislation and discussed later in this chapter, amounts to a more inclusive regime.

Post-April 2004, the borrowing unit is not defined in statute, but represents a practical approach to weighing what value a borrower brings to the negotiation with an independent lender. See INTM413070.

Any attempt to invoke guarantees by subsidiaries of the borrower, rather than to treat those companies as part of the borrower’s assets, should be referred to CTIAA Business International.