INTM564000 - Thin Capitalisation: FA2004 legislation - cases where both paragraphs 1A and 1B can apply

In some cases there may be the possibility of disallowing interest on an intra-group loan under either paragraph 1A or paragraph 1B. This can arise where the borrowing company is thinly capitalised but the lender has lent on the strength of a guarantee from another group company. Consider the following example:

In these circumstances there will be a disallowance to D but a compensating adjustment could be claimed by or on behalf of B (paragraph 1A) or A (paragraph 1B).

In this instance the compensating adjustment is likely to be claimed by or on behalf of B as A is outside the UK.

Sub-paragraphs 6D (5) – (7) contain rules to prevent compensating adjustments being claimed by a lender and a guarantor in respect of the same interest. It is possible for one part of a loan to give rise to an adjustment under paragraph 1A and another part to be dealt with under paragraph 1B, but to the extent that interest is treated as not received by the lender in accordance with paragraph 6C, it cannot also be treated as paid by the guarantor under paragraph 6D.