HMRC internal manual

International Manual

International financial glossary


This glossary is intended to be used as a quick reference for some of the specialist and technical terms contained in the financial transfer pricing sections of the International Manual, not a definitive guide on HMRC interpretation. Important terms within the legislation are generally considered within the guidance itself. These definitions and descriptions should not be relied on in isolation in any important context. The more extensive Corporate Finance Manual glossary partly overlaps with this one, but has a different emphasis.

Suggestions, comments and better definitions would be welcomed by Miles Nelson.

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Accruals basis An accounting basis that recognises income and expenses in the accounting period in which they are earned or incurred, rather than that in which they are received or paid.
Acting Together 1. This refers to the indirect participation legislation at TIOPA10/S158 (previously Sch 28AA Para 4A) which can extend the scope of transfer pricing legislation beyond the usual related party concept. The scope can be wide and tends to affect private equity deals and debt reconstructions, where lenders can be more akin to stakeholders. SeeINTM519040.
Amortisation 1. The equivalent of depreciation, for intangible assets. Amortisation of goodwill or other intangible assets involves writing off over a period of years the amount paid for a business acquisition over and above the value of the assets acquired. As such, it does not usually indicate current or future cash expenditure (unlike depreciation), so adding it back to profits is not likely to be an issue for thin cap purposes.
Amortisation 1. The gradual reduction of a debt by means of periodic payments which are sufficient to cover interest and repay the principal over the life of the loan.
Amortising loan A loan where the principal is paid down gradually over the life of the loan.
Arbitrage Exploitation of differences in tax rules between different countries; for example tax rates, income recognition or timing. This relies on contrasts such as interest/dividend, capital/revenue, or (for the entity itself) recognition/disregard. The 2005 anti-arbitrage legislation (see INTM590000) focuses on hybrid entities and hybrid instruments i.e. those attracting different treatment between tax jurisdictions.
Asset-backed security (ABS) Tradeable debt (normally issued by a company) backed by a pool of assets, such as stocks of finished goods or raw materials, trade debts, bonds, loans or mortgages. If the issuer defaults, the bondholders have first claim on the asset(s) backing the bond.
Asset-linked security Security whose value is linked to the value of an underlying asset, such as land or shares.
Assign or assignment A transfer of rights associated with an asset, such as the right to receive payment on a loan, from the original beneficiary (the assignor) to another (the assignee). This is different from novation, which represents an absolute transfer of ownership. In assignment, the parties to the contract do not change.

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Back-to-back loan 1. Indirect lending where funds are loaned through an intermediary, which enters into separate but linked agreements with a lender and a borrower who are typically related parties. This practice may raise treaty clearance issues if the intermediary is not the beneficial owner of the UK interest, though the nature of the arrangement may not always be immediately obvious.
  1. The term is also used to describe parallel loans, whereby companies in different countries each advance sums in their own currency to fund the other company, a US company providing a UK company with dollars, the UK reciprocating in sterling. Other forms of currency management make this arrangement rare.
Balloon loan or repayment This is very similar to a bullet loan or repayment, except that the term “balloon” refers to a very large payment and does not necessarily imply that the principal is repaid in a single sum. The repayment terms may be heavily back-loaded.
Base case Any kind of model, a business plan for the next five years, say, where the assumptions about performance are neither optimistic nor pessimistic.
Base rate This usually refers to the rate at which the Bank of England lends to other banks, though it can mean an interest rate which is used as a basis for pricing loans. Particular rates are arrived at by adding a margin to the base rate reflecting the risk of the lending proposition. It is not the same as LIBOR, which is a reference rate.
Basis point One hundred basis points (bp) make up one percentage point, so a single basis point represents a hundredth of one per cent. It is a convenient way of expressing small differences in interest rates in an intelligible way: “seventy-five basis points” is easier than “point seven five per cent”. It is used for expressing margins. For example, a loan might be made at LIBOR + 225 bp i.e. LIBOR + 2.25%.
BBA British Bankers’ Association - the leading trade association for the UK banking and financial services sector, which sets LIBOR and publishes it on the BBA LIBOR website. See INTM516035.
Beneficial ownership In international tax, a term mainly relevant to double taxation issues, specifically treaty clearance. The beneficial owner has rights of ownership over a source of income - to enjoy, dispose, etc, as they wish - even where legal ownership lies elsewhere. Under most double taxation agreements, a claim to receive interest gross must be made by the beneficial owner of the income concerned, not merely an intermediary or conduit. See conduit financing.
Bond A debt instrument issued for a period in excess of a year. The issuer (borrower) is obliged to repay the principal on a specified future date, as well as (usually) making periodic interest payments. Corporate bonds are issued by companies, but governments, local authorities and other public bodies may also issue them. They can be bought and sold. See INTM571030 and the Corporate Finance Manual.
Bullet loan This is a type of loan where repayment of the entire principal, and sometimes the interest, falls due at the end of the loan period.
BVCA The British Venture Capital Association, now the British Private Equity and Venture Capital Association, the representative body for the industry, acts as a lobby group and is involved in negotiating memoranda of understanding with HMRC. It has an extensive website.

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Cap See Debt Cap.
Capital contribution An injection of equity into a company, in cash or in kind, which increases the equity reserves of a company without being linked to shares, and which does not generally constitute taxable income for the company or earn a return for the contributor. Its UK accounting status is unclear, and it can be useful to define status and treatment for the period of any thin cap agreement.
Capital distribution Distribution of funds not derived from the profits of a company, being either a return of the original subscribed capital or derived from a sale of capital assets.
Capitalisation The amount of equity in a company, or the value of the equity, as in market capitalisation. Expense may be capitalised e.g. R&D costs treated as an intangible asset.
Capital redemption reserve Under Section 170 of the Companies Act 1985, when a company buys back its own shares using either company’s profits or a fresh issue of shares, the amount by which the company’s issued share capital is diminished on cancellation of the shares must be transferred to a reserve called the ‘capital redemption reserve’. This counterbalances the reduction in equity caused by the cancellation of the repurchased shares.
Cash basis Accounting method in which only cash receipts and cash expenditure are used in computing taxable income.
Check-the-box regulations Method used since 1997 to determine the classification of a domestic or foreign business as a corporation, a partnership or a “disregarded entity” for US tax purposes. A disregarded entity is treated as a branch or division of its owner, not as a taxable entity in its own right The term comes from the practice of ticking a box on an Internal Revenue Service Form 8832 to opt for a particular treatment. If no election is made, default rules apply based upon the liability, and the number of members/owners. Previously slated for reform by Barack Obama, but now appear safe for the moment.
Collar Interest rate collar - a term used for variable-rate debt, setting a range within which the interest rate may vary between a maximum (the “cap”) and a minimum (the “floor”).
Commercial paper Unsecured, short-term loans (less than a year) issued by companies. The debt is usually sold at a discount to face value, and then redeemed at face value. The funds are typically used for working capital, rather than fixed assets such as a new building. They can serve as a cheaper alternative to a bank overdraft.
Commitment Fee A fee charged annually by the lender for holding funds available, whether they are used or not, for example where a company has a facility of £5m but has only drawn £2m. The lender charges for the continuing availability of the remainder. If a transfer pricing adjustment reduces the size of a company’s facility, there should be a corresponding reduction in the fee.
Conduit financing Transaction involving one or more intermediate or “conduit” companies, used at times to reduce withholding tax. A company in a zero withholding territory is placed between the UK and the true lender, who is either in a country with a residual rate of tax (e.g. 10%) or in a tax haven. Such arrangements can be challenged. (See also back-to-back loan, treaty shopping and beneficial ownership)
Convertible debt A bond which gives the holder the option of either receiving repayment of the principal at maturity, or of converting the debt into shares (either in the issuing company, or some other company). Sometimes referred to as hybrid capital.
Coupon (rate) The nominal annual rate of interest receivable on a fixed income security, expressed as a percentage of the principal value, usually paid to the holder of the security annually, semi-annually or quarterly, depending on the type of security. The term is also used more loosely to refer to any income-like return on an investment.
Coupon stripping Former exploitation of the difference in the UK between the tax treatment of interest and accruing discount, eliminated by anti-avoidance and loan relationships legislation. Generally, separating an interest-bearing security into separate components: the right to receive the principal (called the principal strip) and the right to receive interest (a series of coupon strips). The separate components are repackaged and can be traded individually.
Coupon washing (or bond washing) Sale of a bond by a resident to a non-resident immediately before the annual interest is due, to avoid paying tax on the interest. The non-resident sells the bond back to the resident at a lower price and the ‘tax saved’ is divided between the two.
Credit rating This is an estimate of the credit worthiness of a person, a company or a state, an indicator of risk to potential investors. A rating, expressed in letters and +/- (for example “BB-“) heavily influences how much can be borrowed and what it will cost. The result of in-depth study by a ratings agency, it should not be confused with credit scorings carried out as a limited exercise on proprietary software and often encountered as part of a thin cap report. See INTM524000.

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Debenture This generally refers to a medium- to long-term debt agreement where the borrower is a company. Typically, a debenture will set out the terms of the loan, the amount borrowed, repayment terms, interest, charges securing the loan and so on, including the right of a lender to appoint a receiver should the borrower default. Debentures are usually secured by charges on the company’s property, but do not have to be. It is common for the terms of a loan to be in a separate loan agreement document, cross referred to the debenture document which constitutes the security for the loan.
Debt cap 1. In the same way that a lender will place a maximum borrowing limit on a facility, HMRC often seeks to include a covenant in a thin cap agreement which sets a limit on the amount of debt which falls within the agreement. This is often referred to as a “total debt cap”. Interest on any “excessive” debt will be disallowable. See INTM595100 and CFM90000.
Debt cap 1. See Worldwide debt cap.
Debt: equity ratio The ratio of interest-bearing debt to shareholders’ funds; a measure used in bank and HMRC covenants, particularly for financial businesses, and a useful indicator of the soundness of the business’s finances. SeeINTM517010.
Debt/equity swap Exchange of debt for equity, often part of a company reconstruction or takeover.
Debt instrument A legal document evidencing a debt, such as commercial paper or a bond.
Debt capital Funding through loans, such as debentures and bonds.
Deep discount bond A bond where the amount payable on maturity of the debt exceeds what was paid upon its issue. The debt is issued at less than face value, so that when it is redeemed at face value, the lender receives a return over and above the principal originally advanced. The return is taxed as income, spread over the life of the bond.
Derivative financial instrument A financial instrument whose value is dependent on, or derived from, the value of some underlying asset. The most common types are forwards, futures, options and notional principal contracts such as swaps, caps floors, and collars. The province of CT&VAT and best learned about via the Corporate Finance Manual - see CFM50010.
Depreciation This refers to the writing off of the cost of an asset over its economic life, in accordance with recognised accounting principles. It is a non-cash item, often added back in measuring the profitability of a company against its debt obligations. See INTM515040.
Discount The difference between the issue price of a bond or other loan relationship, and its (higher) maturity or face value. Issuing a bond at a discount is a way of rewarding the investor, either instead of or as well as paying interest.
mediation Direct borrowing by companies, government agencies, etc, from investors, rather than through the intermediation of banks between borrowers and lenders. This eliminates banks’ traditional interest “turn” on the transactions, but creates scope for fee income in managing new bond issues to the market.  
  Direct quotation The price of each unit of foreign currency expressed in terms of the home currency, which will be sterling in the UK, e.g. £0.6960=$1. Compare with indirect quotation.
  Double dipping Tax relief in more than one country on the same deductions (often on trading losses) because of differences in tax rules. See Arbitrage.
  Downstream loan Loan from a parent company to its subsidiary.
  Drawdowns The practice of the borrower actually taking the money made available by the lender. A loan agreement will usually specify when instalments up to an agreed maximum can be drawn down and in what amounts.
  Due Diligence This process takes place before a transaction such as a corporate acquisition is completed. The purchaser or financier seeks to verify their understanding of the target’s finances and potential. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountant’s report (trading record, net asset and taxation position) and legal due diligence (implications of litigation, title to assets and intellectual property issues).

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EBIT Earnings Before Interest & Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation & Amortisation
EBITDAP Earnings Before Interest, Taxes, Depreciation, Amortisation & Pensions
EBITDAR Earnings Before Interest, Taxes, Depreciation, Amortisation & Rent
Enterprise Value A measure of a company’s value, EV is calculated as market capitalisation plus debt, minority interest and preferred shares, minus total cash and cash equivalents. It is the theoretical takeover price of a company which may not actually be changing hands. It takes account of issues such as the amount of a company’s debt which a new owner would have to settle. It is an important indicator of value acquired but of limited use as a component in thin cap agreements, since valuations have to be renewed regularly.
Equity capital The value of a company, composed of shareholders’ interests and reserves, after deducting all liabilities. For financial transfer pricing purposes equity means shareholders’ funds, adjusted for any entries of doubtful or ephemeral value.
EURIBOR Interbank lending rate for banks in the Euro zone, used as a benchmark for fixing loan rates within that area. Equivalent to LIBOR (see entry below) and managed by the European Banking Federation.
Eurobond International company bond issued by a company in a market other than its domestic market, in the form of loans, debentures or convertible debentures in a currency other than that of the issuer’s home country. This is the general market usage and differs from the definition at ITA07/S987. See also Quoted Eurobond.

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Facility A very general term for an understanding by which debt is provided. “Facility” rather than “loan” implies an arrangement for drawing and repaying funds in a flexible way, as in a revolving credit facility. This is usually capped at a maximum drawdown figure. Some UK groups rely on an intra-group flexible facility for most or all of their debt.
Facility fee A charge made by the lender to the borrower for arranging the loan. Banks charge a range of fees, upfront and annually, to ensure their return on a finance transaction.
Factoring An arrangement whereby a company sells its invoiced debts, at a discount from their face value, to a specialist debt factor. This gives the company immediate cash and transfers the credit risk from the company to the debt factor. May indicate cash flow problems?
Financial instrument A broad term for the documentation which is evidence of a financial transaction. A legal agreement which may be asset-based or debt-based.
Financial Services Authority (FSA) An independent non-governmental body given statutory powers under the Financial Services and Markets Act 2002, accountable to Treasury Ministers and through them to Parliament. Responsible for overseeing and authorising Recognised Clearing Houses (RCHs), Recognised Investment Exchanges (RIEs) and also firms who carry out investment business. It is the licensing authority allowing Banks to take deposits. The FSA’s objectives are: maintaining market confidence; promoting public awareness of the financial system; consumer protection; and the reduction of financial crime. It was announced in June 2010 that the FSA will be abolished, with most of its financial regulation and licensing powers reverting to the Bank of England.
Fixed rate loan A loan paying interest at a fixed rate for the duration of the loan.
Floating rate An interest rate which is periodically varied in line with a benchmark commercial interest rate, such as LIBOR e.g. LIBOR + 2%.
Floor An option product that guarantees a lender or depositor a minimum interest return. The lower limit of a range, such as a range of interest rates.
Foreign Bonds A bond issued by a foreign borrower in a domestic market, someone from outside the country where in the bond is issued and traded. They can be denominated in any currency, but are likely to be a source of funds not in the issuer’s own currency.

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GAAP Generally Accepted Accounting Practice. UK GAAP is not formally defined, but would be understood to include mandatory guidance, such as Financial Reporting Standards, relevant company law, and the Listing Rules. UK GAAP also includes other guidance such as Statements of Recommended Practice, and other established practice which may not be set out in mandatory guidance, but would be generally accepted by the UK accountancy profession.
Gearing Gearing measures the extent to which a company is funded by debt. It is commonly the ratio of the debt in a company’s balance sheet to its equity. Alternatively, it is sometimes expressed as the ratio of the debt to the balance sheet total (the sum of debt and equity). Also called leverage in the US and some other countries.
Gearing up Gearing in an active sense, describing a situation in which the ratio of debt to equity is increased.
Gilt-edged bond, or gilt A gilt-edged security; sterling denominated loan stock issued by the UK Treasury, and backed by the credit of the UK government.
Gross payment of interest In a thin cap context, this has significance as the payment of UK source yearly interest to an overseas recipient without deducting and accounting for income tax. Where deduction is required by CTA09/S874 (previously ICTA88/S349), interest will be due on unpaid tax under TMA70/S87. See INTM542160 et seq.
Group finance company Wholly-owned group subsidiary that borrows funds, from within and often outside the group, to lend on to affiliates. It may also perform a range of services, from acting as a simple conduit for group money to a sophisticated treasury operation.
Guarantee In financial terms, an agreement to take responsibility for all or part of the debt of another person. Intra-group guarantees are ignored in assessing the borrowing capacity of a company, and no deduction for a guarantee fee can exceed the reduction in arm’s length finance costs which it produces. See INTM542090 and INTM542100.

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Haircut Reducing the level of something that would otherwise be available for a particular purpose. Most typically, in a regulatory context, the fact that booking a particular transaction means that the organisation has to make a 100% capital provision against it effectively means that it has taken a capital haircut because there is then less capital available to cover other business on its books.
Hedge fund A dynamic type of investment fund, very actively managed. Involved in practices such as short selling, where the fund borrows something and sells it in the hopes that they can buy it more cheaply when they have to return what was “borrowed”. If it concerns shares borrowed from a broker, the fund has ways of making money whether shares go up (long selling) or down (short selling) in value
Hedging Taking a position in one market to offset exposure to adverse risk in another. This often takes the form of entering into a contract to buy or sell the product concerned at a fixed price some time in the future, doing the opposite of the commitment which needs hedging and thus eliminating the volatility of that commodity’s price.
High yield debt Bonds with a credit rating below investment grade. Also known as speculative grade bonds, they attract a higher yield for the investor because the risks are higher than for investment grade. Pejoratively known as “junk bonds”. See INTM524050.
Hybrid accounting method An accounting method using a combination of accounting methods for different income items, for example and accruals basis for purchases and sales but a cash basis for other income.
Hybrid entity A hybrid entity is recognised as a person under the tax code of any territory, while its income or expenses are also treated, under the same or a different tax code, as the income or expenses of one or more other persons. An example of a hybrid entity is an entity taxed as a corporation in one country but disregarded in another (US check the box regulations).
Hybrid financial instrument A hybrid instrument has characteristics of both debt and equity e.g. debt which is convertible into equity. For arbitrage purposes, it is either an instrument that can change character, or one that is subject to contrasting treatment in different territories e.g. an instrument treated as a loan relationship in the UK but as equity elsewhere.

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IAS International Accounting Standard, a standard set and formally adopted by the International Accounting Standards Committee (IASC), predecessor to the International Accounting Standard Board’s (IASB). When the IASB replaced the IASC in 2001, it adopted all Standards then in force.
IASB The International Accounting Standards Board (successor in 2001 to the IASC) is the independent accounting standard setting body responsible for developing International Financial Reporting Standards (IFRSs).
IBOR Abbreviation for Inter-Bank Offered Rate. The rate of interest at which banks are prepared to lend to each other. Also see LIBOR.
IFRS International Financial Reporting Standards - a set of accounting rules that became mandatory for the consolidated group accounts of a listed plc for accounting periods commencing on or after 1 January 2005. In the UK, the groups can choose whether to prepare individual entity accounts under UK Generally Accepted Accounting Practice (GAAP), or IFRS.
Indirect quotation The price of each unit of the home currency (sterling) expressed as a value in an overseas currency, e.g. $1.4358=£1. Compare with direct quotation.
Interest Amount charged by a lender for the use of money over time. Most tax treaties contain a definition of interest which may, or may not, correspond to domestic definitions.
IPO Initial Public Offer - the issue of shares by a company to the general public for the first time, which sees those shares listed on a stock exchange. IPOs are underwritten by banks which market the shares and take on any that are unsold.
Investment grade A credit rating which indicates that a corporation’s debt issue has a low risk of default, making it a relatively safe, though not high-yielding investment. It contrasts with High Yield Debt.

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Junk bonds A less flattering term for High Yield Debt.

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Leverage A term commonly used in the USA and more or less synonymous with gearing. It can refer to the use of debt to increase the expected return on equity. It is commonly the ratio of the debt in the company’s balance sheet to its equity. Alternatively, it is sometimes expressed as the ratio of the debt to the balance sheet total (that is the sum of the debt and equity).
Leveraged Buyout (LBO) This takes place when (usually) a private equity firm acquires a controlling interest in a company using a high proportion of borrowed money to finance the acquisition.
Leveraging When a company increases its use of borrowed money to supplement investor share capital in order to boost profits. A higher proportion of debt will increase the amount of interest to be deducted in calculating taxable profits. More commonly known in the UK as `gearing up’.
LIBID The London Interbank Bid Rate. The rate of interest which major London banks are willing to pay on Eurocurrency deposits. It is the mirror image of LIBOR, with LIBOR representing an offer to lend and LIBID a rate at which the banks are prepared to borrow. LIBID is therefore often used as a benchmark for deposit rates, though it is not fixed in the same way as LIBOR. LIBID has traditionally been one-sixteenth to one-eighth of a per cent below LIBOR, but the gap is narrow.
LIBOR London Interbank Offered Rate. A benchmark interest rate fixed by the British Bankers’ Association at 11 a.m. each London business day. The BBA determines the price by asking 16 banks for the rate at which that bank could borrow in each of the range of currencies quoted in London, for a number of different durations, if it were to ask for and accept inter-bank offers just before 11 am. The data is averaged to produce daily interest rate figures for each of the currencies for borrowing periods from one day to twelve months. See INTM516035.
Liquidity Liquidity refers to the ability of a company to meet its obligations as they fall due. If it does not maintain that ability, it may become insolvent. Liquidity is readily available money, not money tied up in long-term investments, owed to the company, etc. If a company does not have the cash to pay its bills, it risks legal action against it for recovery of debts. A company becomes illiquid hen it does not have sufficient working capital at its disposal.
Loan note An instrument giving evidence of a loan. Also another name for a bond.

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Management Buyout (MBO) A buy-out where some or all of the existing management team take a significant share in the ownership of the business.
Margin A measure of the reward arising out of the difference between linked transactions: buying and selling, borrowing and lending, etc; the return which is obtained from these activities.
Mezzanine debt Mezzanine debt sits between senior debt and equity in the capital structure of a business. Often a high-risk form of finance, it is subordinated to the senior debt, so that if the borrower gets into financial difficulties, the mezzanine debt is unlikely to be recovered. It has the characteristics of debt but it may carry a right to shares as a way of providing some form of recompense to the holder in the event of default.

The term originally referred to debt financing which gave the lender an equity stake, or had the possibility of conversion into equity. It has more recently been used to describe any middle layer of debt in leveraged buyouts, “below” the senior debt and “above” the equity, whether or not any equity rights are attached to the debt.

Such debt may be fixed rate or floating, secured or unsecured and it is common that the loan is bullet repayment rather than amortising.    
  Money market A wholesale market for the buying and selling of money. Money market paper is predominantly negotiable and traded just like any other product. Maturities are short-term (less than a year).

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Paper Generic term for any short-term negotiable debt instrument, such as commercial paper.
Participating preference shares These are preference shares but they carry a right to a profit share as well as to a fixed dividend, in years when the ordinary dividend exceeds a certain level.
Participatory relationship Where one company directly participates in the management, control or capital of another; or both are under common management, control or capital. This is the required relationship (in broad terms) for a transfer pricing provision to exist between two persons.
Payment-in-kind (PIK) notes These arise where interest on a debt is not paid in cash as it falls due, but where the lender has agreed to receive funding bonds which are issued to “pay” the interest. These funding bonds themselves carry interest on the same terms as the original debt. Cash payment will not usually be made until the notes mature or are redeemed early.
The unpaid interest, the PIK margin, may be added to the principal owed, either directly by rolling up the interest and incorporating it into the capital amount owed, or by satisfying the interest liability through the issue of further loan notes called PIK notes. PIK notes are recognised as payments of interest for tax purposes, but are in effect further loans, themselves bearing interest.    
  Perpetual loan Loan having either no maturity date or being repayable after a very long time, sometimes recharacterised as equity capital for tax purposes. Such debt represents a very considerable credit risk to the investor, and would therefore be expected to carry a high rate of interest. See zero coupon bond.
  PFI Private Finance Initiative is a funding model introduced by the UK government in 1992 which aims to deliver large scale public infrastructure projects using private funding, through a public-private partnership. The PFI consortium enters into a contract to build the project and in some cases to operate the project after completion.
  Preference shares Shares where the holders have the right to receive dividends (usually fixed) before ordinary shareholders, and priority over ordinary shareholders in the event of a winding up, but no voting rights. These can have many of the characteristics of debt.
  Premium A sum paid on maturity of a debt security, over and above the principal sum, by way of reward to the investor. This is a variation on the discounted loan model, where rather than (or in addition to) interest, a return is made by the lender when the loan is terminated. Discounts and premiums are treated as interest arising over the life of the debt, but attract no withholding tax since there is no interest payment.
  Primary market The market for the placement of new securities, such as international, domestic and foreign bond issues. Any subsequent resale or purchase is handled on the secondary market.
  Private equity Money invested in companies which are not publicly quoted or traded, typically by PE investors acquiring controlling stakes in mature companies using predominantly debt. High debt levels mean that profits are made on disposal of the asset, so PE ventures are often sold within a couple of years.
  Promissory note An unconditional, written and signed promise to pay a certain amount of money, either on demand or at a specified future date.

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Quoted Eurobond A “quoted Eurobond” means any security that is issued by a company, listed on a recognised stock exchange, and which carries a right to receive interest. Payments of interest out of a quoted Eurobond are excluded from the requirement to deduct withholding tax from UK interest paid overseas. See CTM35218 for more detail.

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Redeemable preference shares As preference shares, with the issuer having the right to redeem them, so they have debt characteristics.
Reference rate This is a benchmark interest rate, beyond the control of the parties to the agreement, on which a floating rate is based. It will fluctuate over time but will always be in the same relationship with the reference rate. LIBOR is used as such a rate e.g. LIBOR + 2.75%
Regulatory capital The minimum capital required to be maintained by banks and other regulated financial institutions pursuant to, amongst other things, the Basel I and Basel II accords. Regulated by the FSA in the UK. See INTM237731 onwards.
Repo A means of providing short term finance against collateral. The `borrower’ agrees to sell securities (such as government bonds or shares) to the `lender’, with an agreement to buy them back (repurchase) at a specified later date, either at an agreed higher price or at the market price. The interest rate implied from this `lending’ transaction is called the repo rate. There is a statutory definition of a repo in ITA07/S569. Effectively, this is a secured loan, the price difference representing the interest. The initial purchaser typically makes substitute payments to the seller in place of the interest or dividends formerly received on the securities.
Revolving credit A credit arrangement allowing the borrower some flexibility as to the scale and timing of a proposed borrowing or note issue. The borrower can usually increase or reduce his indebtedness with some freedom during an agreed period.

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Second lien Secured debt but only with a call on the assets of the borrower which is ranked behind that of more senior secured debt. A second lien lender will have to agree to subordinate its claims on any assets to those of the first lien lenders.
Secondary market The market in which bonds or shares trade once they have been issued. See primary market.
Securities Documents demonstrating rights either to corporate share capital (e.g. share certificates) or to government or corporate debt (e.g. bonds, debentures, etc.)
Securitisation The packaging of debt or other receivables into the form of a tradable security.
Senior debt Debt which has priority over other debt and equity in the event of the borrower running into financial difficulties or facing liquidation of ’its assets. Senior debt is usually secured against the borrower’s assets and will have first call on them.
SPV A Special Purpose Vehicle is an entity created solely for a particular financial transaction or series of transactions. It may sometimes be something other than a company, such as a trust.
SPVs are often used to make a transaction tax efficient by choosing the most favourable tax residence for the vehicle.    
  Subordinated debt Debt which is issued on terms which stipulate that it will only be repaid once the claims of more senior creditors have been satisfied. As opposed to senior debt.
  Surety Used in the TIOPA10 definition of guarantee; where the pledge or guarantee forms part of the contract being secured, not a separate agreement. Something (or someone) standing as guarantee.
  Syndicated loan A loan issued by a group of lenders, usually banks or financial institutions, arranged and administered by one bank which acts as “arranger”. Designed to spread the risk on large loans between a number of lenders.

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Term loan A loan for a defined period, where repayment cannot be demanded (provided that the terms are complied with).
Thin capitalisation In tax terms, a UK company is thinly capitalised when it has more debt than it either could or would borrow acting purely in its own interests, leading to the possibility of “excessive” interest deductions (i.e. more than would arise if the borrower was acting at arm’s length from the lender or guarantor). See INTM540000 and INTM510000 onwards.
Tier 1 capital The core measure of a bank’s or other regulated financial institution’s financial strength from regulator’s point of view. It consists primarily of shareholders’ equity but may also include preferred stock that is irredeemable and non-cumulative and retained earnings. It forms part of a bank’s or other financial institution’s regulatory capital.
Tier 2 capital A regulator’s measure of a bank or other regulated financial institution’s financial strength with regard to the second most reliable form of financial capital, consisting of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. It forms part of the bank or other financial institution’s regulatory capital.
Treasury Bonds (T-Bonds)  
Treasury Notes A US government debt security issued by the Treasury Department. The term Treasury Bond (T-bond) is applied to such a security with a maturity of 10 years or more; shorter-term US Treasuries (USTs) are referred to as Treasury Notes.  
  Tranche A tranche is literally a slice (French origin). It may refer to a single issue of bonds or shares out of a larger total, differentiated by date of issue or terms, an instalment of a larger whole, or an identifiable layer.
  Treaty shopping Taking advantage of the network of double taxation agreements (DTAs) to obtain a more advantageous position than the facts warrant. For example, even after clearance Country A levies withholding tax at 15% on interest paid to Country B, per the DTA between A and B. Countries A and B have DTAs with C which have nil withholding tax clauses. By routing the loan through a company in Country C, companies in Countries A or B can avoid withholding tax. Many UK treaties contain anti-treaty shopping clauses to prevent this, and most require that the applicant for clearance should be beneficial owner of the income. C is unlikely to be the beneficial owner if it is part of an arrangement between A and B.

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UK borrowing unit The grouping which is considered for thin capitalisation purposes. It comprises the UK borrower plus its assets and liabilities. Broadly this means its subsidiaries, but subsidiaries may be examined more closely to check whether they do in fact represent value which is accessible to the borrower in the event of a default.
Upstream loan Loan from a subsidiary company to its parent.

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Vanilla (or plain vanilla) A financial instrument, such as a bond or an interest rate swap, of a conventional, standard or well-understood type.
Venture capital Investment in a start up company, or early stage growth business with the investor taking a stake in the shareholding of the business. This involves relatively small investments.
Venture capital fund A fund attracting third party investors that invests in and or lends on to businesses needing finance.

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Warrant A share warrant is a document giving the bearer entitlement to shares in the company which issued it. Ownership can be easily transferred without the company documenting the transfer.
Withholding tax Tax imposed on income at source, placing the obligation on the payer not the beneficial owner of the income. The UK does not have a “withholding tax” as such; what is withheld is income tax. Broadly, interest arising in the UK and paid overseas should have tax withheld and remitted to HM Revenue and Customs, subject to specific exemptions. The lender is likely to be able to claim repayment of tax withheld and secure a lower/nil rate of withholding for the future.
Working capital Current assets less current liabilities. A full definition is complicated, but a company has sufficient working capital if it can continue its operations and meet short-term debt and operating expenses. Good working capital management also means not holding cash unnecessarily, or overstocking.
Worldwide Debt Cap This refers to the measure introduced in Finance Act 2009 to restrict UK debt costs by reference to worldwide group debt costs. CT & VAT advise on this subject - see CFM90000.

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Yield curve The relationship, as expressed in a graph, between the cost of borrowing and the time to maturity of the debt in question. A rising curve shows higher yield as the debt matures, longer-term debt being riskier.

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Zero coupon bond A bond that pays no interest. Such bonds will be issued and traded at a substantial discount to the face value. The investor’s return is the difference between issue price and redemption value.