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HMRC internal manual

International Manual

HM Revenue & Customs
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Thin capitalisation: practical guidance: creating agreements between HMRC and the group: length of the agreement

The thin cap agreement should include a clear statement as to its intended duration. This is between three and five years. Historically, this followed the usual practice for treaty clearances, with which thin cap agreements were usually linked, but even without this connection, five years remains a sensible maximum for a thin cap agreement since that is at the outer limit of what can be forecast with any accuracy.

Where the agreement includes a number of years which are in the past, it is reasonable to interpret duration as beginning with the current year. It is disheartening to sign up to an agreement with three years in the past and two in the future. An agreement can be longer than three to five years, so long as the future component is within that range.

Where the agreement is affected by uncertain future events, rather than having a short agreement it may be sensible to agree that a particularly difficult issue will be reviewed at intervals or when relevant trigger events or actions occur. An example may be how future significant acquisitions are to be funded. This can be an optional or conditional review, but it need not bring the entire agreement to an end or open it up for wholesale revision. This should only be considered where the matter cannot be managed by a provision in the agreement which has automatic application each year. Where significant uncertainty exists, a shorter agreement may be appropriate.

The appropriate duration of an agreement will depend on a number of factors, including:

  • whether the group is expanding, contracting or in a steady state - see INTM517070 and INTM517080. For example, if the UK group has recently acquired other businesses, and as a consequence the financial ratios are temporarily different from expected norms, it may be advisable to revisit the capitalisation position after two or three years. However, another solution to this problem is to agree to a set of stepped ratios moving, year by year, toward a level which reflects the appropriate arm’s length position.
  • where there is doubt about the ability of the UK group to fulfil the financial conditions of the agreement. It may be wiser to agree a shorter length of agreement and check the situation after a couple of years. This need not necessarily entail the same degree of scrutiny as when the agreement was made. A review could concentrate on the particular elements of uncertainty.
  • where the UK group is forecast to be so different in structure or size or activity within a few years that the current agreement is inappropriate. In fact, it is a standard term in ATCAs that the agreement will be renegotiated if the borrower changes radically.