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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: introduction: referrals to Business, Assets & International

Business, Assets & International (BAI) no longer sets monetary limits triggering mandatory referral of potential thin capitalisation cases, except in private equity cases, where the team will retain an interest in deals of £1bn or more. Referral is more a matter of common sense and working within the transfer pricing governance framework

BAI is likely to take an interest where significant sums and complex issues coincide, and some of the “issues” which might still prompt contact with the team are set out below. It is vital that the Transfer Pricing Team at BAI is consulted as soon as there is any prospect of litigation on a transfer pricing issue, since litigation will require BAI endorsement and input.

It is important that BAI maintains a level of direct involvement in a range of cases in order to maintain contact with current trends and novel challenges, to provide useful practical support, and ensure consistency and good practice.

The first line of support is the Transfer Pricing Group nationally, and those IIMs who have relevant experience, but the Transfer Pricing Team at BAI is available by phone or email in cases where local support is unavailable or unsuitable. In complex cases, a more detailed technical submission will be needed. Requests and referrals should first go through the local Transfer Pricing Specialist, who will be responsible for the governance process - see INTM481000 onwards.

The following are of particular interest to Business, Assets & International and other specialists:

Thinning out - using a group restructuring to increase significantly the proportion of debt to equity in a UK group, whilst the commercial activities remain largely the same. This is classically achieved through the setting up of a new UK parent company which then uses a high proportion of intra-group debt to acquire the “old” UK group, plus perhaps a couple of overseas group companies not already held by the UK. This issue may also give rise to unallowable purpose arguments, under CTA09/S441-442 (see below).

Upstream loans - where UK-based companies receive loans rather than dividends from overseas subsidiary companies in order to thin out the UK tax base. The CFC guidance at INTM256860 requires that such cases be reported to the Base Protection Policy Team.

Treaty shopping - broadly, treaty shopping can be regarded as an arrangement put in place to take advantage of a provision in a double taxation agreement (DTA) for tax purposes - see INTM504000.

Beneficial ownership - under most double taxation agreements, overseas lenders applying to receive interest without the deduction of UK income tax have to show that they are entitled freely to enjoy the income received from the UK borrower. To qualify for this treaty benefit, they must not be acting as a conduit or intermediary, obliged to pass the income on to an entity in a territory which does not have the appropriate treaty with the UK. See INTM342550 and the guidance on the implications of the Indofood case from INTM332040 to INTM332080. Practical guidance on identifying cases is at INTM504000.

Loan relationships for unallowable purposes - CTA09/S441-S442 (formerly FA96/SCH9/PARA13) is an important anti-avoidance provision which disallows deductions for loan relationship debits on a just and reasonable apportionment to the extent that the loan from which the deductions arise is for unallowable purpose. The Anti-Avoidance Group is ultimately responsible for the application of this legislation and may wish to have input into cases.

Borrowing to repay share capital or to pay dividends - this is a complex area where the particular facts and circumstances are crucial and early guidance from a specialist would be advisable.


Responsibility for applications for clearance under the 2005 anti-arbitrage legislation is as set out in INTM597510. There is guidance from INTM597500 onwards on identifying cases, factors to consider, running enquiries, etc.