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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: the Advance Thin Capitalisation Agreement process: Introduction to the ATCA process and its governance

Since March 2007, the only way a company can obtain any certainty about the application of the thin cap legislation is by an agreement made under the Advance Pricing Agreement legislation. The legislation is contained in Part 5 of the Taxation (International and other Provisions) Act 2010 (“TIOPA10”). Statement of Practice 01/12 explains the process, supplemented by guidance in this manual.

The main changes in 2007 were:

  • Treaty clearances for payment of interest overseas are dealt with by the DT Treaty Team at Nottingham LBS. Thin cap is no longer considered in the course of determining whether treaty relief is due.
  • The thin cap ATCA process is distinct from the transfer pricing Advance Pricing Agreement (APA) programme. ATCAs are always unilateral and are co-ordinated by financial specialists in the Transfer Pricing Team at CSTD Business, Assets & International. However, both ATCAs and APAs are subject to the APA legislation at TIOPA10/S218-S230.
  • The ATCA process does not obviate the need for treaty clearance applications, where withholding obligations apply. The overseas lender must submit an application to LBS Nottingham and be granted clearance before interest can be paid subject to a treaty rate of withholding tax. (See INTM413220 onwards)
  • ATCAs can cover forms of funding - such as Eurobonds or discounted loans - where no treaty clearance is required.

ATCA Governance

Thin cap enquiry work falls fully within the governance process, since it is an aspect of transfer pricing governance as explained at INTM481030. The differences applying to ATCAs are highlighted here.

ATCA applications are subject to less detailed governance than transfer pricing cases because they are taxpayer initiated and might be expected to have an impetus of their own. However, rolling action plans should be maintained while working on ATCAs, and governance will apply at take-up and settlement time, and if a case is not settled within the recommended time period.

An ATCA will not be signed off by HMRC until a review of the proposals has been carried out by at least one authorised person, someone who has the necessary expertise and experience, but has not been closely involved in the case. Bigger cases will be reviewed by the transfer pricing panels and at a more senior level.

It may become necessary while working an ATCA application to raise a protective enquiry for a year which is about to pass out of time for assessment. This keeps the year open, while the ATCA will continue to take precedence. Older cases are subject to regular and increasingly stringent review.

Sign-off of the agreement and subsequent monitoring of compliance are dealt with at INTM512100.