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HMRC internal manual

International Manual

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HM Revenue & Customs
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Thin capitalisation: practical guidance: opening a case: the opening meeting

Thin capitalisation issues are almost never settled by correspondence, unless the issue is a superficial one such as fine tuning the wording of the agreement.

However comprehensive the information initially supplied, a meeting will usually be necessary to properly understanding of circumstances and reasons for the transactions. In particular, a meeting is the ideal way of exploring the thinking behind funding decisions.

A motto for successful, efficient thin cap work might be: don’t write the letter, have the meeting.

The advance thin cap agreement (ATCA) application process should in normal circumstances take 6-9 months from submission to sign off, and exchanges of correspondence can only slow the process down.

Matters to be covered in a meeting should include relevant parts of the following:

  • The exact nature of the business - how the assets and money are used, how cash is generated and managed. How does the company differ from its closest competitors? What is unique about it?
  • How has the business changed in recent years, particularly as a result of the funding in question - for example: new ventures, mergers, acquisitions, or business/asset disposals? What significant changes are planned or anticipated?
  • What was the purpose of the loan, and how does the borrower expect to manage the money over the term of the loan? How is it secured?
  • Discuss the relevance of third party evidence (comparables, offers of funding) which have been put forward to support the borrowing as arm’s length
  • Consider how the anticipated development of the business informs the projections of future performance. What do the directors expect to happen and why? For what purpose were the projections drawn up? How well considered are they?
  • Discuss any projections or proposals for the content of the thin cap agreement, key ratios (EBITDA:interest, debt:EBITDA, etc). Are these realistic and achievable? What are the risks which might derail plans?

Overall, the aim is to obtain sufficient knowledge of the company and its activities to allow a balanced judgement, based upon common sense, as to what funding would have been provided at arm’s length, from the viewpoint of both borrower and lender.

The first (or only) meeting should be an opportunity to get a reasonable understanding of the transactions and the background to them. It should be clear by the end of the meeting:

  • what further written material is needed, if any
  • what are the outstanding issues requiring further exploration
  • what are the main differences between the parties
  • what happens next

The company has asked to engage in the ATCA process, so should be willing to meet reasonable demands and share information, so it is best to treat the task as a joint effort to reach a reasonable solution acceptable to both sides.