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HMRC internal manual

International Manual

HM Revenue & Customs
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Thin capitalisation: practical guidance: opening a case: other issues and where to look for them

There are a number of other issues which are worth looking out for while considering thin cap, even though it may not be appropriate or even possible to tackle them at the same time as the thin cap, and these include:

  • Other transfer pricing issues - a UK company lending to connected persons on non-arm’s length terms, may lead HMRC to impute interest on amounts advanced. It is not unusual for company borrowing from within its group to also lend its “surplus” cash to other group members. These loans may be informal in nature (only visible as high group debtor balances in the Notes to the Accounts) with few stated terms. UK-UK balances may be relatively low risk, but loans to non-UK group members should be properly priced. (SeeINTM502010
  • Borrowing for an unallowable purpose - this is borrowing which may or may not be acceptable from a thin cap standpoint, but which includes a purpose which is not a business purpose of the company (See CFM38000)
  • Arbitrage - this exploits differences of treatment between tax regimes. The 2005 anti-arbitrage legislation is considered at INTM590000). In considering arbitrage as a risk it is necessary to understand the route by which funding reaches the UK borrower; what type of companies are involved, where they are located and how interest is treated in their hands.
  • Upward lending - If subsidiaries lend upwards to a UK parent instead of paying dividends, the UK parent will incur costs for the use of money to which it may otherwise be entitled. Upward lending is uncommercial, unless it is temporary lending of surplus funds or where the subsidiary acts as a group finance company.
  • Treaty issues - in the context of thin cap work, this tends to mean withholding tax issues. Where funds are supplied from a territory without the appropriate tax treaty with the UK (one that gives full relief from UK income tax on interest paid overseas), the money may be routed through a company in a country which has the required treaty provision. This may happen in relation to a low tax jurisdiction or a country such as Canada or Belgium where the withholding tax rate is only partially reduced by a valid treaty claim. See advice on Beneficial Ownership at INTM504000 and INTM332000.

However, see the comments at INTM512030 as regards caution about exploring non-ATCA issues during the ATCA process.