Thin capitalisation

By Tolley in association with Robert Langston of Saffery Champness

The following Corporation Tax guidance note by Tolley in association with Robert Langston of Saffery Champness provides comprehensive and up to date tax information covering:

  • Thin capitalisation
  • ‘Acting together’
  • Amount of loan
  • Interest rate
  • Compensating adjustments for interest
  • Guarantees
  • Quasi-equity
  • Inter-company accounts
  • EBITDA restriction

Loans between associated companies where one of those companies controls the other, or where both are under common control, are subject to the transfer pricing rules.

A company will be considered to be ‘thinly capitalised’, ie it does not have enough capital to support the debt, where:

  • a loan exceeds the amount which the borrower would or could have borrowed from an independent lender
  • the terms of the loan differ from those that would have been agreed with such a lender

In this case, the interest on the excessive part of the loan will be disallowed as a deduction in arriving at the assessable profits or allowable losses of the borrower.

In addition, the transfer pricing rules may apply to the rate of interest charged on a loan if this rate is higher than would have been charged by an independent lender.

TIOPA 2010, s 152; INTM413000

The HMRC guidance on undertaking a thin capitalisation transfer pricing enquiry can be found at INTM511000.

Advance clearance can be obtained from HMRC to confirm the acceptable level of debt in a company.

For more information, see the ATCAs and APAs guidance note.

‘Acting together’

Where a lender ‘and other persons acted together in relation to the financing arrangement’, the rights of those other persons will be attributed to the lender when determining if it controls the borrower. This means that even though a lender may not control the borrower, a loan will fall within the transfer pricing rules if other (controlling) shareholders were involved in arranging the loan.

TIOPA 2010, s 161

These rules only apply to financing arrangements. The transfer pricing rules will not apply to other transactions between a lender and borrower who are

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