INTM414420 - Financial transactions: Election to be treated as deemed guarantor
TIOPA10/S153B provides for a UK resident company to make an election to be treated as a deemed guarantor for a borrowing provision of another UK resident company where there is a qualifying participatory relationship between the companies.
The deemed guarantee applies in respect of the amount of the borrowing which is excessive at arm’s length in the provision between borrower and lender, ie, to the extent it would not have been lent between independent enterprises without a guarantee.
The election under this section is designed to ensure groups have flexibility in the way they structure and finance their UK business operations for considerations such as the placement of debt and assets within the UK group.
With the making of appropriate elections under this section, accompanied by the introduction of the UK-to-UK exemption, the debt and borrowing capacity of UK companies within scope of the exemption can be considered on a UK basis as opposed to an individual entity or borrowing unit basis.
Further, if an election is made under TIOPA10/S153B which is then subject to disallowance under TIOPA10/S147, then the deemed guarantee will be respected as the provision of a guarantee for the purposes of a claim under TIOPA10/S192. This places the criteria for making such claims on a clear legislative footing for intragroup arrangements where a formal guarantee was not provided but extra UK borrowing capacity exists.
Scoping Criteria
To make an election the deemed guarantor must be a UK resident company and have a qualifying participatory relationship with the borrower.
A ‘qualifying participatory relationship’ for the purposes of this section means that the participation condition is met through the rules in TIOPA/Part 4 concerning direct participation. The participatory relationship does not arise only as a result of indirect participation rules at TIOPA10/S159 to S161 or through a transfer pricing notice under TIOPA10/S148A being issued.
Making the election
The election must specify the first chargeable period of the borrower for which the election is made, and must be made within four years of the end of that period.
Additionally, where HMRC issues a discovery assessment to the borrower in respect of the borrowing provision, the deemed guarantor may make an election under TIOPA10/S153B within a period of one year from the issuance of the notice.
The time limits for making an election under this section allows flexibility to make an election in situations where HMRC opens an enquiry into the chargeable period of the borrower. Similar allowance is made for circumstances where HMRC issues a discovery assessment in respect of a chargeable period of the borrower.
How the election applies
Once the election is made, the deemed guarantor will be considered as having provided a guarantee for the amount of borrowing at all times while it remains UK resident and maintains a qualifying participatory relationship with the borrower.
If the deemed guarantor becomes UK resident or begins to have a qualifying participatory relationship with the borrower partway through a chargeable period of the borrower, then an election made in respect of the borrowing in that chargeable period will apply from the first day in that period on which the criteria were met.
If for any reason, during a chargeable period for which an election has been made, the deemed guarantor ceases to have a qualifying participatory relationship with the borrower or ceases to be UK resident, then from that date the election will have no effect, and the deemed guarantor will not be treated as having provided a guarantee in respect of the borrowing.
The election is irrevocable.
Example 1: s153B election timing
Company A has borrowed an excessive amount from non-UK resident related party Company B. Company C, a UK resident company with which company A has a qualifying participatory relationship, has additional borrowing capacity such that it can provide a deemed guarantee of the excessive amount.
Company A borrows the excessive amount during the accounting period ending 31 December 2026, therefore Company C has until 31 December 2030 to make an election under TIOPA10/S153B.
Example 2 mid-period election timing
Assume that the facts are the same as Example 1, except that Company C attains a qualifying participatory relationship as the result of a business restructuring that occurs on 31 July 2026. For the purposes of this example the borrowing occurred on 1 Jan 2026.
If Company C makes an election under TIOPA10/S153B to be treated as deemed guarantor of Company A’s borrowing for the accounting period ending 31 December 2026, the election will have effect from the date on which Company C attained the qualifying participatory relationship, 31 July 2026, as opposed to the start of the period.
Further detail and examples to be published shortly.