Thin capitalisation: practical guidance: creating agreements between HMRC and the group: Example of an agreement: model ATCA - appendix 1 - interest cover ratio
HMRC has issued a model ATCA the body of which is at INTM520090. It is not intended for it to be followed slavishly, but it may serve as a template for many cases and as an aide memoire for the main features which HMRC is likely to expect to see in an agreement.
The model agreement’s first appendix is as follows:
|Period ending||For example, EBITDA (or EBITA or EBIT) to Interest|
|20X1||b : 1|
|20X2||b : 1|
|20X3||b : 1|
|20X4||b : 1|
|20X5||b : 1|
Calculation of Disallowance
The disallowance will be calculated by reference to the ratio shown above for the relevant period (‘the required ratio’) and the interest cover ratio calculated using the actual results of the UK Group (‘the actual ratio’).
Allowable interest is calculated using the following formula:
|actual ratio (expressed as a number)||x actual interest expense|
|required ratio (expressed as a number)|
Illustrative calculation for period ending 31 December 20X1
Assume the agreement has an EBITDA interest cover covenant of b:1, and the actual figures for the period are an interest charge of £z and a ratio of EBITDA to interest of a:1 which is lower than the required ratio. Allowable interest is therefore calculated as follows:
|a||x £z (actual interest expense) = £y|
This results in allowable interest of £y and disallowed interest of £z - £y.