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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: the Advance Thin Capitalisation Agreement process: completing the process

Signing off the ATCA

After appropriate application of the governance process, (INTM453060), a member of the Transfer Pricing Group or an International Issues Manager may authorise an ATCA on behalf of HMRC.

Two copies must be signed, by signatories on behalf of the company and HMRC, with one copy to be retained by each party.

Below is the preamble to the agreement in the words of the Model ATCA, stating the legislation under which the agreement is made:

This is an agreement made between the parties identified below for the purposes of section 218 TIOPA 2010 in accordance with Statement of Practice 01/12. The agreement determines the tax treatment of the interest arising on the financial provisions identified below for the purposes of Chapter 1 Part 4 of TIOPA 2010.

In accordance with section 229 TIOPA 2010, this agreement may be modified as necessary to enable effect to be given to a mutual agreement made under and for the purposes of any double taxation arrangements.

Every ATCA must carry this preamble, the names of the parties and the signatures.

Monitoring the ATCA

The Model Agreement has the following wording at Paragraph 7:

For the period of the agreement, the corporation tax computations of [the borrower] will include a schedule demonstrating whether the Group has complied with the financial benchmarks and how any consequences have been dealt with; any other affected companies will reflect resultant adjustments in their computations. The schedule will also detail any adjustment required to the [UK Group’s] consolidated accounts to arrive at the defined terms (e.g. applying a ‘Frozen GAAP’ approach subsequent to the adoption of International Financial Reporting Standards).

TIOPA10/S228 refers to the borrower’s responsibility to supply reports and other information, as required under the agreement and by virtue of a request by HM Revenue and Customs in accordance with the agreement.

Reporting requirements will normally be annual, satisfied by a schedule or computation accompanying the borrower’s annual return. The ATCA should specify the form and timing of such reporting. The Model ATCA issued alongside Statement of Practice 01/12 includes examples of how calculations are carried out to test whether covenants have been met.

Whatever formulae or calculations are to be employed, it is useful if the ATCA includes an example as an appendix to the agreement which demonstrates what computations and other material is to be submitted. This ensures that both sides understand what is required and how it should be presented. It is worth spending some time making sure that the annual reporting will be in a form that will make sense to people other than those involved in negotiating the agreement.

How much prominence is given to these reports will depend on what they contain. If the borrower has breached a covenant, it should be brought to the attention of the caseworker, Customer Relationship Manager, or transfer pricing specialist, to report or discuss remedial action.

Any concerns or changes impacting on the agreement should be communicated to HMRC in good time.