OT60125 - Transferable Tax History - Calculation of tracked profits – Interest and financing costs

The legislation allows HMRC to specify how apportionments are to be made for financing costs. The guidance at OT22000+ and in particular the guidance at OT22002 must be followed to the extent that, for tracking profits and losses, the arm’s length standard applies to the TTH asset as if it was a separate business.

Example – whole company stylised balance sheet:

Liabilities		Assets
Borrowings to acquire TTH	400	TTH asset	400
Share Capital	600	Other assets	600
Total	1,000		1,000

Considered as a whole the company is not thinly capitalised. However when the TTH asset is treated as a separate business it is clear that the asset is entirely financed by debt whilst the company (or the UK group as necessary) has, or should have, equity capital to finance part of the TTH asset or operations.

The application of an arm’s length standard to the TTH asset would require it to be funded partly by equity. Accordingly, only the amount of interest that would have been allowable if arm’s length terms had applied is allowable in calculating the tracked profits or losses of the TTH asset.  In applying the arms-length principle in these circumstances the guidance on Thin Capitalisation at INTM413000 should be followed. It should also be noted, for the reasons highlighted by the example above, that this approach needs to be applied to third party debt as well as related party debt.