Part 2 of the form has questions designed to indicate whether,
because of a group relationship or other situation, the amount of
interest paid may be influenced other than by commercial
considerations.
Interest may be payable at a fixed or floating rate.
Intra-group agreements can be vague on the interest rate to be
used, sometimes even leaving it to the lender's discretion or `to
be agreed'. Clearance cannot be given on such a basis. A specific
formula or fixed rate appropriate to the length of the loan, type
of finance, etc. needs to be agreed.
Fixed rate loans are normally for fixed periods, and the
rate will depend upon the currency of the loan, its length, and the
creditworthiness of the borrower. It is often worth asking how
connected parties determined a fixed rate.
Floating rates are usually expressed as a percentage margin
over a market rate such as LIBOR or a bank's base rate for the
relevant currency. International Division 4/5, Melbourne House have
access to a database of interest rates and can advise if necessary.
If the United Kingdom borrower has bank borrowings, the
terms of these may provide a useful comparable.
Sometimes the borrowing is from a bank, etc., but the amount
has been influenced by a guarantee given by an overseas parent. The
influence can also be by way of a letter of comfort or a letter of
awareness. International Division 4/5, Melbourne House would like
to see any cases where excessive finance seems to have been
obtained by such means.
A loan agreement may refer to a `collateral' or `security'
agreement. This should be followed up and the other document
obtained. This may reveal a back to back arrangement (see ITH1228).
The fact that a large bank loan is apparently unsecured may also be
a sign of such an arrangement. Since April 1996 we can use the loan
relationship provisions at FA96/SCH9/PARA13, to challenge this, but
the use of these is monitored centrally. Consequently International
Division 5/2, Melbourne House need to see all such cases before a
challenge is mounted.
The facility is only likely to be connected with a United
Kingdom permanent establishment if the lender has a United Kingdom
branch or where the loan or facility was effectively negotiated by
a United Kingdom affiliate.
