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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: breaches of agreements between HMRC and the group: breaches and treaty clearance

Before 2007, thin capitalisation agreements were explicitly linked to treaty clearance applications. They represented some of the conditions under which HMRC granted clearance for interest to be paid gross (or subject to a lower rate of tax) to an overseas lender. This gave the agreement the status of a conditional treaty clearance, issued under Statutory Instrument 1970/488. If the terms of the thin cap agreement were breached, the treaty clearance might be forfeit. In practice such difficulties were usually resolved by a disallowance of interest in the tax computation, an injection of equity or reduction of debt, or some combination of these, rather than terminating the clearance and requiring the UK borrower to start withholding at the full rate again.

A breach of an Advance Thin Cap Agreement will not jeopardise the actual existence of any treaty clearance agreed in relation to interest. The clearance will still apply to interest that is agreed to be at arm’s length, but will not cover any interest reclassified as non-arm’s length by the action of the ATCA. . Non arm’s length is not covered by treaty clearance, and such amounts will when paid become subject to withholding obligations under ITA07/S874.

TIOPA10/S187 may remove the withholding obligation from such non-arm’s length amounts, if a claim is made, as explained at INTM413150.

If the application of the agreement results in a disallowance, the compensating adjustment legislation may be available to the lender under ICTA88/SCH28AA/PARA6C, or to UK companies of the global group (excluding companies in the borrowing unit) who have the borrowing capacity to offset the disallowance, under ICTA88/SCH28AA/PARA6D. See INTM413140 and INTM413160.