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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: creating agreements between HMRC and the group: statement of practice 01/12

Statement of Practice 01/12

Advance Thin Capitalisation Agreements under the APA Legislation


  1. This Statement of Practice replaces SP 04/07, which introduced the practice of providing Advance Thin Capitalisation Agreements (ATCAs) under the Advance Pricing Agreement legislation. It updates the legislative references, largely to the Taxation (International & Other Provisions) Act (TIOPA) 2010, and reflects HMRC’s current practice.
  2. The practice is intended to determine in advance the transfer pricing of financial transactions within Part 4 of TIOPA 2010. The legal basis for ATCAs is provided by the legislation at S218-230 TIOPA 2010 (formerly at S85-87 Finance Act 1999), which provides for Advance Pricing Agreements (APAs) in relation to transfer pricing more broadly. Detailed guidance on interpretation and practice is in HMRC’s International Manual (‘INTM’), available online at .
  3. The ATCA process is initiated by the business, in accordance with S223 TIOPA 2010, as an application for clarification by agreement of the effect of applying the arm’s length principle to the financial provisions between the business and any lender.
  4. Thin capitalisation is a complex area of transfer pricing. Because transfer pricing is particularly fact-sensitive, it is helpful to be able to discuss the issues as close to real time as possible.


  1. Information supplied by the business in relation to an ATCA request will be kept confidential in accordance with Section 18 of the Commissioners for Revenue and Customs Act 2005. However, such information will contribute to the pool of information held by HMRC about that business and no undertaking can be given that it will be taken into account only in relation to the ATCA.

Scope of ATCAs

  1. Agreements under this Statement of Practice will be restricted to matters within S218(2)(d) TIOPA 2010: that is, the tax treatment of any provision made or imposed between the taxpayer and an associate. As this Statement of Practice relates to thin capitalisation the provisions involved will be financing provisions.
  2. An ATCA covers the transfer pricing treatment of a particular borrower, or may extend to other issues in appropriate cases, such as interest imputation and the taxation of finance and treasury companies, subject to the usual criteria such as risk and complexity. There are currently no selection criteria for ATCA applications and none are planned. Smaller cases are more likely to be accepted where the information is comprehensive, clearly presented and accompanied by a draft agreement. Companies submitting incomplete applications may be asked to resubmit.
  3. Funding arrangements suitable for ATCAs include, but are not restricted to, intra-group loans, quoted Eurobonds, and cases of indirect participation (“acting together”).
  4. ATCAs will normally be for future (and possibly current) periods, depending on the timing of the application, but may also extend to periods which have ended, if the facts and circumstances are sufficiently similar. S224 TIOPA 2010 allows the agreement to have effect for periods which have ended before the agreement is made. Self-assessment returns may be amended and enquiries into earlier years resolved on the basis of an agreement. HMRC will not apply hindsight in doing so, but will consider the similarity of the circumstances prevailing during these earlier periods.

Applications for an Advance Thin Capitalisation Agreement

  1. An ATCA may be requested by a business which is, or will be, undertaking provisions of a financial nature within the meaning of sections 147(1) and 152(1) of TIOPA 2010, as extended by sS158-162. Application for an ATCA is at the discretion of the business, though there may be circumstances where HMRC encourages businesses to apply, for example during an enquiry.
  2. The process is designed to help resolve financial transfer pricing issues which have a significant commercial impact on an enterprise’s results, where the issues would be unlikely to be regarded as “low risk” by HMRC, or where the arm’s length provision is a matter of doubt.

Making the application

  1. An approach may be made to the Customer Compliance Manager (CCM) to discuss making an application. The application when made must clearly include a request for an agreement under S218 TIOPA 2010, together with the applicant’s proposed treatment of the provisions in question. It will also need to include a diagram of the group structure for the time at which the provision occurred, background material providing a working knowledge of the business of the company or group under consideration, and details of the finance in question (see for guidance the chapter starting at INTM513000).
  2. The application must also have due regard to the requirements of S223, which states that an application by a person (“A”):



    1. It must set out A’s understanding of what would in A’s case be the effect, in the absence of any agreement, of the provisions in relation to which clarification is sought.
    2. It must set out the respects in which it appears to A that clarification is required in relation to those provisions.
    3. It must set out how A proposes that matters should be clarified in a manner consistent with the understanding mentioned in subsection (3).


  1. Applications may be made before transactions are carried out, but HMRC will only enter discussions for an ATCA if the terms of the proposed transactions have been finalised, such that the steps involved are clear and the debt has been quantified and priced. HMRC will suspend or cease discussions if the plans turn out to be tentative in any significant respect.
  2. Emailed applications and documents in electronic form are welcome: however, for practical reasons, where there is extensive supplementary documentation it may be better for this to be provided once the identity of the caseworker is known.


  1. HMRC regards five years as the maximum period for which it is reasonable to assume that the method agreed for dealing with the relevant issues will remain appropriate, so ATCAs will typically be agreed for between three and five years, depending on the circumstances. If funding renewal is imminent at the end of that time, and the ATCA has proved durable, a short-term ATCA may at that stage be available on the same or similar terms without the need for the full process, to enable the applicant to have an HMRC agreement coterminous with the actual funding timetable.

Using the Model ATCA (see Annexe 1)

  1. HMRC’s purpose in making such a model available is to try to ensure greater consistency between agreements and to shorten the period of time it takes to reach agreement.
  2. HMRC has updated the model ATCA, which provides a possibletemplate foragreements under this Statement of Practice. The model presents a fairly straightforward outline of commonly used criteria and definitions, together with examples of the sort of terms which HMRC is likely to find acceptable. The inclusion of a complete draft ATCA with the application is likely to help progress and resolution of the discussion process. The Model is attached as an Annexe to this document, and will be incorporated into the International Manual in due course.
  3. It is recognised that the model will not be appropriate for all applications, but it should provide a useful framework for adapting to the particular needs of the applicant.

Progressing the application

  1. HMRC will endeavour to respond to the initial contact within 28 working days.
  2. Unless the application is acceptable as proposed, or is subject to only minor adjustments, meetings between HMRC and the applicant will inevitably play an important part in the ATCA process, with initial contact probably by phone. However it is important that HMRC has an opportunity to consider a well-prepared briefing in the form of the written application before a meeting is arranged. HMRC will seek to agree a rolling action plan and update it regularly. HMRC will then consider the application in accordance with existing guidance (see INTM413000 onwards and INTM510000 onwards).


  1. In accordance with S218 TIOPA 2010, an ATCA between the business and HMRC represents a binding undertaking on the parties that the treatment of the transfer pricing issues covered by the agreement will for a specified period be determined in accordance with the agreement.
  2. All ATCAs will include specific reporting obligations, including a requirement that the applicant demonstrates whether it has satisfied all covenants and other conditions, and if not, what action it has taken to rectify the position in accordance with the agreement. This report will normally be included with the tax computations for the period. The wording of any reporting requirement should be incorporated into the ATCA, in compliance with S228 TIOPA 2010. Best practice suggests including as an appendix to the agreement a template of the basis of any calculations which are to be included in the report.
  3. However, an ATCA shall cease to have effect if its terms are not observed and the provisions leading to revocation, nullification, revision or mutual agreement are triggered.
  4. In form, the agreement between HMRC and the business will be based on the approach described at INTM520010 and will therefore include terms and conditions which may be familiar from thin capitalisation enquiry work. Comments below about interaction with other legislation and clearance procedures should be noted. The agreement will require a declaration under S218 that it has been made for the purposes of that section.
  5. The ATCA should where appropriate include wording to provide guidance and allow flexibility for potential revisions, for example where there are issues which might merit the option of a periodic review, without necessarily interfering with the continuation of the agreement. This would probably only arise if there was a significant but manageable area of uncertainty for the future, and has limited application.

Withdrawing from the ATCA process

  1. HMRC may withdraw from the ATCA process if the business is not co-operating in providing the information necessary to consider the application properly, or where the proposals are too tentative (as described in para 14). In cases where agreement cannot be reached with the business, HMRC will issue a formal statement recording the reasons. HMRC does not have any obligation to continue discussion beyond the point at which it has determined that agreement cannot be reached. Any withdrawal from the ATCA process will be monitored centrally by Business Assets & International.
  2. A business may withdraw from the ATCA application at any time before final agreement is reached, but it would be helpful if HMRC was informed of the decision.

Interaction with the Obligation to Deduct Withholding Tax

  1. ATCA applications are very often received from UK companies borrowing from overseas lenders. This means that while the ATCA application will be made by a UK resident borrower, any related application for clearance for interest to be paid at a rate in accordance with a double taxation agreement will be made by the non-UK resident interest recipient. The two processes are entirely distinct. An ATCA does not remove the withholding obligation imposed by S874 Income Tax Act 2007 on the payer of UK source interest to account for income tax on the payments. The payer is obliged to withhold income tax at the basic rate until advised by HMRC to do otherwise. HMRC will only issue such a notice following a valid application by the overseas lender under the relevant DTA.
  2. Guidance on applications for treaty clearance, including the Treaty Passport Scheme introduced in 2010, may be found on the HMRC website - see

Interaction with other legislation and clearance procedures

  1. An ATCA will only cover financing provisions within the scope of S218(2) TIOPA 2010, and the only part of that subsection relevant to thin capitalisation is 2(e), which relates to “the treatment for tax purposes of any provision made or imposed, whether before or after the date of the agreement, as between A and any associate.” The definition of “associate” in S219 is the same as the “participation condition” for transfer pricing in S148. This means that an ATCA can only apply to the transfer pricing of debt. All other provisions in the Taxes Acts will continue to apply. For example, compliance with the terms of an ATCA would not prevent restriction of interest under the unallowable purpose rule at Sections 441-442 CTA 2009 (formerly Para 13 Sch 9 FA 1996). Details of other clearance procedures provided by HMRC can be found at .

Nullifying and Revoking ATCAs

  1. Where HMRC believes that the business entering into the agreement has fraudulently or negligently provided false or misleading information in connection with the making of the agreement or otherwise in the preparation of the agreement, S226 TIOPA 2010 gives HMRC the power to annul the ATCA i.e. to treat it as if it had never been made. When considering using this power HMRC will take into account the extent to which the terms of the agreement would have been different in the absence of the misrepresentation. S227 includes details of the penalty for misrepresentation.
  2. In accordance with s. 221 TIOPA 2010, a pre-return agreement is only valid as long as its terms are met. Therefore HMRC may revoke an ATCA if the business does not comply with its terms and conditions. The legislation refers to a failure in relation to a “significant” provision of the agreement. A provision is significant if it is a condition of the agreement having effect. This should be clear from the terms of the actual agreement in question. In practice, ATCAs frequently have alternative courses of action to revocation, including ways of rectifying a breach. In the event of nullification or revocation, HMRC would be obliged to reconsider any treaty clearance provided in respect of related financing provisions.


  1. Because an ATCA is an agreement between HMRC and a business which decides how certain issues will be determined for the purposes of the Taxes Acts, a return made on any other basis in relation to those matters during the currency of an ATCA will constitute an incorrect return, with possible penalty consequences.
  2. A penalty not exceeding £10,000 may be imposed where false or misleading information is suplied fraudulently or negligently in connection with an application for, or the monitoring of an ATCA, and the agreement may be nullified (see S226 and S227 TIOPA 2010).


  1. In accordance with normal appeal procedures, the business has the right to appeal against the amount of any additions to profits that arise following the revocation or cancellation of an ATCA.
  2. Where there is a mutual agreement made under and for the purposes of any double taxation agreements which is not consistent with the terms of the ATCA, it shall be the duty of HMRC to modify the ATCA to give effect to the mutual agreement reached with a treaty partner, in accord with section 229 TIOPA 2010.

Contacts within HMRC

  1. Business Assets & International has oversight of the ATCA process.
  2. The first contact for information about advance thin capitalisation agreements under this Statement of Practice should be the CCM of the business concerned, and they will engage the assistance of a transfer pricing specialist. If there is no known CCM, the application should be sent to the ATCA Mailbox where it will receive specialist consideration.

An email post box will be made available for submission of Local Compliance cases.

  1. Business Assets & International’s involvement in issues relating to individual ATCAs is for the most part in a supporting or advisory role. It will retain oversight of the process, and direct policy in relation to ATCA work.

For assistance on issues relating to policy matters contact Miles Nelson on intra-group funding cases and Graeme Grozier on private equity buy outs. For comments on the process generally, contact Hazel Preece.