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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: knowledge and negotiation: negotiating a solution

As indicated in INTM514030, there is little chance of finding a single correct answer to the problems of a thin capitalisation case. There will be a range of possible answers, probably derived from data on a small number of comparables, within which one can be reasonably sure that a particular value approximates to the arm’s length standard. It is then a matter of judgement as to where a particular case falls within that range. Preferably this narrowing down should be achieved by a closer look at the evidence, rather than by the application of statistical concepts (median, mean, etc). This means that, where it cannot be agreed that the transaction as presented (the actual provision) constitutes an arm’s length position, it will usually be necessary to determine the limits of the arm’s length range and negotiate as to where on that range the answer for that case lies.

In negotiating the solution a variety of factors need to be taken into account. These include:

  • the individual set of facts and circumstances associated with the case - see INTM512050 and INTM513010 on information gathering 
  • consideration of the most appropriate way to arrive at the arm’s length values for the case - see for example INTM517060 on how the nature of the commercial activities of a company influences debt, and the chapters starting at INTM516000 and INTM517000 for information on using debt and interest related ratios in assessing the arm’s length position
  • the need to ensure that a proposed negotiated settlement is consistent with HMRC’s parameters for an acceptable settlement - see INTM511040 on getting assistance with the case.

The aim is to get to a common sense, balanced view taking into account all the relevant information.