Thin capitalisation: practical guidance: breaches of agreements between HMRC and the group: other solutions
A thin capitalisation agreement will usually contain a clause indicating that one of the consequences of a breach of financial conditions is a disallowance of interest for tax purposes. Unless agreed otherwise, the disallowance will normally occur in the year of the breach - see INTM521040.
However, it may be open to the parties to agree and record in the agreement that one of the possible solutions is to introduce further equity into the group, using it to reduce debt, or to make a repayment of debt. This will strengthen the balance sheet and reduce the likelihood of a recurrence.
Part 4 of TIOPA10 is put into effect by tax adjustments, not by changing the underlying figures, but it is often appropriate to try to gain agreement to actual changes such as the introduction of equity, or some debt reduction, since breaches of covenants may recur year after year unless the balance sheet is bolstered up by fresh capital or the underlying problem otherwise remedied.