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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: creating agreements between HMRC and the group: example of an agreement - the model ATCA

The body of the model agreement, which was issued alongside Statement of Practice 01/12, is reproduced below. It is not intended to be followed slavishly, but may serve as a template for straightforward cases and an aide memoire as to the main features which HMRC is likely to expect. The appendices are on subsequent pages.

Business Name

Reference

Advance Thin Capitalisation Agreement under section 218 TIOPA 2010

Section 1 - Preamble

This is an agreement made between the parties identified below for the purposes of section 218, Taxation (International and Other Provisions) Act 2010 (“TIOPA10”) in accordance with Statement of Practice 01/12.

The agreement determines the tax treatment of the interest arising on the financial provisions identified below for the purposes of Chapter 1, Part 4, TIOPA10.

In accordance with section 229 TIOPA10 this agreement may be modified as necessary to enable effect to be given to a mutual agreement made under and for the purposes of any double taxation arrangements.

Section 2 - Parties

This agreement is made between [name of business or businesses] and HM Revenue and Customs.

Section 3 - Financial provisions covered by the agreement

[details of financial provisions]

Section 4 - Term of the Agreement

This agreement will apply to chargeable periods of the [business or businesses] ending between [xxx] and [xxx].

Section 5 - Definition of terms used in financial conditions

Unless otherwise stated the terms defined below are to be measured by reference to the consolidated results of the UK group. Where the UK group does not produce consolidated financial statements, an informal statement of consolidated results will be needed.

Debt

Debt means any financial indebtedness of the group calculated on a consolidated basis. Financial indebtedness includes any indebtedness in relation to;

  • money borrowed (including any overdraft);
  • any debenture, bond, note or loan stock;
  • any finance lease, hire purchase, credit sale or conditional purchase agreement to the extent that it is treated as debt on the balance sheet;
  • the capital element of any amount raised under any other transaction having, as a primary and not as an incidental effect, the commercial effect of borrowing; but excludes trade creditors unless their term is of sufficient length to be interest-bearing.

Total Interest

Total Interest means interest and amounts in the nature of interest (such as discounts) of [the UK Group], whether paid or accrued.

Net Interest

Net Interest means Total Interest less interest receivable and amounts in the nature of interest receivable by [the UK Group].

EBIT

EBIT means the consolidated earnings of the UK Group before the deduction of interest and tax and exceptional items disclosed as such in the in the financial statements.

EBITA

EBITA means the earnings of [the UK Group] before the deduction of interest, tax, amortisation and exceptional items disclosed as such in the financial statements.

EBITDA

EBITDA means the earnings of [the UK Group] before the deduction of interest, tax, depreciation, amortisation and exceptional items disclosed as such in the financial statements.

Equity

Equity includes called-up share capital together with any associated share premium, reserves (including revaluation and capital redemption reserve reserves), retained profits and any amounts acting as equity such as irredeemable preference shares, interest free loans and capital contributions.

Loan to Value (‘LTV’)

The ratio of outstanding debt (as defined above) to the value of the assets on which it is secured.

UK Group

The UK Group is defined as [xxx] and all its subsidiaries including any entity that is treated as a subsidiary under applicable accounting principles.

Section 6 - Financial Conditions

Interest Cover Ratio

The [UK Group] agrees to maintain an interest cover ratio [e.g. EBITDA/EBITA/EBIT to Total Interest/Net Interest] for each chargeable period during the Term of the agreement of at least the ratios set out in Appendix 1.

Gearing Ratio

The [UK Group] agrees to maintain a gearing ratio [e.g. debt to EBITDA or debt to equity or LTV] for each accounting period during the Term of the agreement not exceeding the ratios set out in Appendix 2.

Section 7 - Monitoring of financial conditions

For the period of the agreement, the [corporation tax computations of the UK Group] will include a schedule demonstrating whether the Group has complied with the financial benchmarks and how any consequences have been dealt with; and other affected companies will reflect resultant adjustments in their computations.

The schedule will also detail any adjustment required to [the UK Group’s] consolidated accounts to arrive at the defined terms (e.g. applying a ‘Frozen GAAP’ approach subsequent to the adoption of International Financial Reporting Standards).

Section 8 - Consequences of meeting the financial conditions

If both the financial conditions above are satisfied the Total Interest will not be subject to disallowance under Chapter 1 Part 4 TIOPA10.

This agreement does not relieve any party to it of an obligation to deduct income tax from payments within section 874 ITA 2007), nor does it prevent the application of any other provision of the Taxes Acts.

Section 9 - Consequences of not meeting the financial conditions

If the Interest Cover Ratio is lower than the ratio set out in appendix 1 or if the Gearing Ratio is higher than the ratio set out in appendix 2 then a financial condition has not been met.

Where a financial condition has not been met then a failure arises under the terms of this agreement.

A failure under this agreement should be remedied by a disallowance of interest in the chargeable period in which the failure occurred. The disallowance will be calculated in accordance with the methods set out in either appendix 1 and 2, depending on which condition has not been met.

For the avoidance of doubt in any situation where neither of the financial conditions are met any disallowance applied to correct the failure will be the larger of the two calculated according to the method laid out in the appendices.

Section 10 - Circumstances in which this Agreement may be revised

This agreement may be revised in the following circumstances [xxx].

  • Where the parties agree to a revision
  • If the agreement is no longer considered appropriate to the facts and circumstances of the company, either the company or HMRC may seek to renegotiate the agreement for future periods.

Section 11 - Circumstances where the application of section 9 above may be modified

[The list below is illustrative, but the changes must be substantial. The reader is referred to the International Manual at INTM520070.]

Where the sole or principal reason for a company failing to meet a condition of the agreement is a wholly exceptional event not anticipated by the [UK Group] at the time the agreement was entered into, such as:

(a) a catastrophic or unusual disruptive event, which may be external or internal to the group, temporarily affecting the business of the [UK Group], such as a prolonged impairment to its income-producing capacity; or

(b) a large acquisition or disposal; or a significant restructuring of the funding arrangements in relation to which the ATCA was agreed, or

(c) an unexpected event such as a one-off accountancy provision that, while it has significant impact on the profit & loss account, does not affect the ability of the company to service the debt

then the [UK Group] will not be in breach, to the extent that the failure is due to the exceptional event.

Signatures in agreement

For [The Group]

Name ………………………………… Signature …………………………

Date ………………………

Official Position: ………………………………

For HMRC

Name: ………………………………….. Signature ………………………

Date ………………………

Official Position: Transfer Pricing Specialist