The transfer-pricing legislation at ICTA88/S770 et seq. is covered in detail from INTM436000 onwards. It includes a provision at ICTA88/S773(4) to extend the meaning of transaction for transfer-pricing purposes, as follows:
Sections 770, 771, except subsection (5)(b), and 772 and this section shall , with the necessary adaptations, have effect in relation to lettings and hirings of property, grants and transfers of rights, interests or licences and the giving of business facilities of whatever kind as they have effect in relation to sales, and the references in those sections to sales, sellers, buyers and prices shall be deemed to be extended accordingly.
The highlighted phrases were intended to cover the making of
loans or advances other than at an arm's length rate. The
application of these phrases to loans has in the past been a matter
for dispute and CT & VAT, International CT has always defended
its position on this issue.
Counter arguments International has encountered in the past
have included
Although a full analysis of the factual circumstances is required, CT & VAT, International CT has in practice had difficulty finding validity in any of the above arguments, and this is a view now supported by case law (see below). The possible exception concerns the contention that a loan is performing an equity function, and this argument might be accepted in certain circumstances. This area is explored in detail later in this module, (from INTM503000 onwards).
ICTA88/S770 - S773 apply not only to loans but also to loan guarantee fees and loan arrangement fees paid to connected persons (see INTM502040). These may take the form of a small percentage of the principal, a one-off payment or even an addition to the interest rate. The method of calculation should be established early on, particularly so that the amount at stake can be estimated with reasonable accuracy as part of the risk assessment process. There may be other facilities and services in the area of financing to which ICTA88/S773(4) may apply and these should be considered on their own facts.
(See
INTM501050 for the details of this
case)
This 1996 Special Commissioners' decision, in the case of
Ametalco v CIR, is significant because it is widely accepted as
having confirmed the view of CT & VAT, International CT that
financial facilities such as loans are included in the phrase
'business facilities of whatever kind' and therefore subject to
transfer-pricing considerations. The Special Commissioners
considered that the reference in ICTA88/S773(4) to "the giving of
business facilities of whatever kind" was very wide and on the
natural meaning of the words included the advancing of money for
business purposes.
A summary of the Special Commissioners' Decision SpC94:
Ametalco UK Ltd and Ametalco Ltd V CIR appears on the next
page.
HM Revenue & Customs' interpretation of ICTA88/S773(4), as
endorsed by the Ametalco case, was confirmed by a decision in the
above case, where it was further concluded that it was by
"necessary adaptation" that the language of ICTA88/S770 could
encompass the provision of a business facility as a transaction.
It demonstrates that facilities can be provided indirectly as
well as directly and that the legislation should be construed in a
commercial not a legalistic way.
This case is summarised at
INTM435080 and discussed in relation
to its impact on ICTA88/S773(4) at
INTM436070. It is also an important
case for the transfer-pricing treatment of share options, a subject
considered in detail at
INTM464140.
