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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: creating agreements between HMRC and the group: monitoring conditions

A thin capitalisation agreement should state explicitly what the company will need to do each year to fulfil the monitoring conditions. If a computation is required, it may be helpful to both sides to agree the form it will take, and it may be worthwhile attaching an example as an appendix to the agreement.

Among the points to be included are:

  • frequency of monitoring - where very large loans are involved, third party lenders are likely to set quarterly monitoring requirements. This is generally impractical and onerous for HMRC but it could be considered in appropriate cases. Alternatively, monitoring may extend to the annual reporting of monthly or quarterly figures, perhaps with a condition that HMRC be alerted if there is a problem at a month or quarter end. More usually, the expectation is that a computation or report will be made at the time of the annual corporation tax return, though again with the proviso that early notice should be given where a problem such as a breach of the agreement is anticipated or experienced.
  • form of the monitoring - this should include a statement accompanying the corporation tax return demonstrating how the covenants have been complied with, or the extent to which they have been breached. The tax return should also detail where an adjustment has been made to rectify the breach. The onus should be on the signatory company to certify that conditions have been met.
  • a practical example of any complex calculations which are to be submitted
  • a statement of the obligation to inform the office dealing with the agreement as soon as a breach becomes apparent.

A small number of companies do not comply with the monitoring requirements. If a computation is submitted with a return and it is not in accordance with the agreement for the period, then the return may be incorrect. Under the APA legislation the agreement stands in place of the legislation