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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: the main thin capitalisation legislation: Evolution of the thin capitalisation legislation: 29 November 1994 - 31 March 2004

Thin capitalisation under s209 ICTA 1988

Finance Act 1995 brought in ICTA88/S209(2)(da) and S209(8A) to (8F), amended parts of S212, and repealed 209(2)(e)(iv), generally with effect after 28 November 1994.

In contrast with S209(2)(e)(iv), S209(2)(da) defined a distribution as the amount of the interest paid by the borrower to the lender which exceeded the arm’s length amount. This amount was treated as a distribution (INTM413050).

These provisions were explicit in applying the arm’s length principle. S209(8A) - (8F) set out various provisions, including the matters to consider when establishing the arm’s length amount.

The most significant provisions in S209(8A) - (8F) were on UK grouping, defining the UK consolidated borrowing unit which should be considered in assessing the arm’s length amount of borrowing. Subsection 8D defined the UK borrowing unit as the top UK holding company of the group containing the borrower, plus all the holding company’s effective 51% subsidiaries. Subsection 8F excluded dual resident companies from the unit.

S209(2)(da) also differed from S209(2)(e)(iv) in that where the former applied by reference to UK residence, the latter applied in terms of chargeability to corporation tax.

As a result, almost all loans between connected UK companies continued to be excluded from thin capitalisation considerations.

These provisions referred to above were repealed by FA 2004 with effect from 1st April 2004 and replaced by amendments to ICTA88/SCH28AA, most notably Paragraphs 1A, 1B, 6C, 6D, and 6E, which became effective from the same day. Parts of Para 5, which had largely excluded UK-UK transactions, were repealed from the same date so that transfer pricing, and of course thin capitalisation, were extended to UK-UK transactions.

SCH28AA was rewritten as part of the Tax Law Rewrite project into Part 4 of the Taxation (International and Other Provisions) Act 2010, which applies to accounting periods ending on or after 1 April 2010.