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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: opening a case: where the case begins

Routes to thin cap resolution

INTM512010 details the changes which took place when the current regime was introduced in 2007. There are now two avenues by which thin cap and associated issues can be explored:

  • Taxpayer-initiated: An application from the borrower for an Advance Thin Capitalisation Agreement (ATCA), made under the APA legislation starting at TIOPA10/S218. This allows companies to obtain certainty for the future regarding interest deductions (INTM512000 onwards)
  • HMRC-initiated: An enquiry into thin cap issues following receipt and risk assessment of the latest CT return. This will only happen if the business case for the enquiry is agreed under the Transfer Pricing Governance rules (INTM481000)

A company is welcome to discuss the possibility of applying for an ATCA at any time, but future certainty can only be obtained through a formal application - see INTM480050.

Advance Thin Capitalisation Agreements (“ATCAs”)

Statement of Practice 01/12 sets out in detail how the ATCA process works. The onus is on the applicant (the borrower) to provide a detailed package of information, together with precise proposals for the terms of an agreement for HMRC to consider. There is a Model ATCA which is reproduced in the International Manual from INTM520090 onwards. This can form the basis of the agreement.

Agreements can now be reached in circumstances where there is no treaty clearance issue: for example where funding is by quoted Eurobond or where debt has been issued at a discount.

Continuing importance of withholding obligations

It should be clearly recognised that the separation of the treaty process and thin cap considerations does not extinguish the interest payer’s obligation to withhold income tax under ITA07/S874. Nor will the lender receive clearance to receive interest gross or at a lower rate of withholding without making a valid application and obtaining clearance to pay gross (or at the treaty rate). The treaty team at LBS Nottingham will handle claims from overseas lenders.

Post-return enquiry

An enquiry into thin cap issues constitutes a transfer pricing enquiry within the governance rules of the Transfer Pricing Group, and will require approval of a business case for taking up the enquiry, regular reviews, etc. (See transfer pricing governance rules from INTM481000)