INTM507060 – Intra-group funding: group finance companies and the treasury function

Opening enquiries into UK group treasury companies

An enquiry into a UK-based group finance company will usually be initiated following receipt of a corporation tax return for that company. In some cases the Inspector may be notified that a treaty clearance application has been made by an overseas affiliate which is providing long term funding to the UK company and wishes to receive its interest payments gross under a double taxation agreement. There have also been instances where a group has approached the Inland Revenue for advice or approval when considering setting up a group finance company in the UK. In these circumstances the Inspector should bear in mind the instructions at INTM468000 regarding the circumstances in which pre-return advice may be given.

Whatever the form of approach, the Inspector will need to make a decision as to whether to launch an enquiry into the operations of the UK-based group finance company. The Inspector therefore needs to make a decision as to whether the UK tax base may be at risk from the operations of the finance company. The first point to consider here is the size and extent of transactions with overseas affiliates, as if the group finance company acts wholly or mainly in a domestic context then any risk from non-arm’s length transfer pricing may be minimal.

Having established that there is sufficient risk to address in a UK-based group finance the company, the Inspector should then consider:

• whether the company appears to be highly geared by reference to arm’s length standards for the type of business it conducts and/or
• whether the UK company is unprofitable, or insufficiently profitable, particularly if it has been operating for some time and/or it appears to be a complex and substantial business.

In any case where there is prima facie cause for concern the Inspector will need to establish at the outset:

• the nature and scale of the company’s activities
• the gearing and profitability of the UK company
• in cases where the company is newly set up, any projections as to the future gearing and profitability of the company.

When considering the level of gearing of the UK company the Inspector should bear in mind the instructions at INTM507040 and should refer to the Thin Cap/Arbitrage Group at CT & VAT, International CT any case where it is suspected that a group finance company is operating in the UK with the aim of artificially inflating the debt capacity of the UK grouping. The Inspector should also report to on any case where it appears that a UK company is being used as a conduit for passing money around a group, as there may be treaty shopping issues to consider.

The instructions which follow on working and concluding an enquiry into a UK group finance company should be applied to cases where it is accepted that the company concerned is a sophisticated operation undertaking a range of financial activities on behalf of fellow subsidiaries which include the borrowing and lending of money. The Inspector should simply 'look through' UK group finance companies that do little more than act as a financial conduit for a group’s UK operating companies.