INTM507050 – Intra-group funding: group finance companies and the treasury function

How to risk assess a group treasury company

In addition to routine risk assessment practices there are a number of special considerations for group finance companies:-

Transfer pricing

• is it functioning as a genuine treasury operation or is it little more than a financial conduit company?
• are the terms of inward and outward loans arm’s length?
• are the risks being properly rewarded?
• is the UK company charging a commercial rate for services other than provision of debt/taking deposits performed on behalf of the overseas companies?
• what are the transfer-pricing implications of any cash netting arrangements?

Thin capitalisation

For foreign-owned groups, the existence and activities of a UK group finance company would need to be factored into any thin capitalisation enquiries with regard to the group’s UK activities and assets.

Acting as agent for non-residents

Where a UK group finance company enters into arrangements with foreign associates, it will be necessary to consider whether the arrangement is such that the overseas companies in the group are trading in the UK, with the UK finance company as their agent.

For UK tax purposes, is the group finance company to be regarded as carrying on a trade of borrowing and lending?

Cases should be submitted to the Thin Cap/Arbitrage Group at CT & VAT, International CT before it is accepted that group finance companies are carrying on a trade of borrowing and lending, making and receiving loans on current account. In any event it is important that the Inspector should look critically at claims by group finance companies to be carrying on a financial trade. In some cases it might be argued that the fiscal motive predominated to such an extent that the company could not be regarded as trading. Activities with no genuine commercial purpose would not be trading. But even if the company did have a commercial purpose, its transactions might still not be trading transactions. In some cases it might be argued that the finance company was merely acting as an agent for operating companies in the group; in others, that a commercial fee or a “turn” on the funds that pass through the company maybe an appropriate way of rewarding the services being performed.

In arguing that the company is trading as a financial concern, the group finance company will have to meet the test laid down in CIR v Livingstone 11TC538:

'Whether the operations involved … are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made'.

For example

• the terms of the loans might vary
• there might be no attempt to match borrowings and lending
• overall sums may be small
• it may not have adequate reserves to cover bad debts, or maintain an adequate liquidity reserve
• it might deal exclusively with its own fellow subsidiaries.

All the relevant factors have to be considered and no one factor will necessarily be decisive.