INTM547020 - Thin capitalisation: financial transactions - ICTA88/SCH28AA

‘Series of transactions’ brings in indirect finance

One of the most important elements of Schedule 28AA as it relates to thin capitalisation is in ICTA88/SCH28AA/PARA3, which applies the legislation to a ‘series of transactions’. This allows HMRC to limit interest deductions on excessive debt where the debt is provided by a third party but on the strength of non-UK group members. ICTA88/S209(2)(da) (repealed with effect from 1 April 2004 and replaced by the revised ICTA88/SCH28AA – see INTM560000 onwards) cannot apply to indirect financing arrangements of this sort.

The term ‘series of transactions’ is defined as ‘a number of transactions each entered into (whether or not one after the other) in pursuance of, or in relation to, the same arrangement’. The transactions do not have to occur in a recognisable sequence. They may be simultaneous or removed in time from one another, but they have to be part of an overall scheme.

ICTA88/SCH28AA/PARA3(4) provides that conditions can be made or imposed between two persons even in circumstances where there is no transaction in the series to which both persons are parties or where:

• the parties to the series of transactions do not include one or both persons
• there is one or more transactions in the series to which neither person is party.

It follows that Schedule 28AA can apply to a series of transactions where a bank lends to a UK borrower with a guarantee provided by the overseas parent:

DRAWING - INTM547020D1

In this example there is no transaction between the parent and the UK subsidiary but there would be provision by means of a series of transactions if the loan had been advanced by the bank on the understanding that the overseas parent would meet any default in the interest payments and loan principal repayments.

Another example is given below:

DRAWING - INTM547020D2

Remember that ‘transaction’ is widely defined in the legislation at ICTA88/SCH28AA and that a loan agreement may not reveal the full extent of any ‘arrangements’ and ‘understandings’ which may exist. If an Inspector is dealing with a loan from a third party bank which they suspect has been made with backing from a parent and/or fellow subsidiary, they may like to ask for details from the bank as to whether any assurances, etc., were given by the parent or fellow subsidiary companies.