INTM571010 - Thin capitalisation: practical guidance - introduction: The aims of this module
The main aim of this module is to provide some practical guidance on the processes and techniques of working thin capitalisation cases - which for the purposes of this manual embraces financial aspects of transfer pricing work such as ensuring that a company is receiving the appropriate reward on the money it lends. The information provided should enable caseworkers to work most cases to a successful conclusion.
This module assumes that the reader is familiar with the concepts, if not the precise wording of the UK legislation, relating to thin capitalisation and the general principles of its interaction with the double taxation agreements that the UK has with other countries. The Thin capitalisation (legislation and principles) module of this manual - from INTM540000 onwards - deals with these points in more detail.
The UK approach to thin capitalisation is to apply the arm’s length principle - treating parties to a transaction as if they were independent of each other - to lending and borrowing transactions. The legislation in Schedule 28AA ICTA 1988 commits itself to interpreting transfer pricing transactions in line with the principles of the Organisation of Economic Co-operation and Development (OECD). This commitment is largely built around Article 9 of the OECD Model Tax Convention and on the OECD Transfer Pricing Guidelines - see INTM541040. This module aims to outline how HM Revenue & Customs puts the legislation into practice in accordance with these principles. The guidance is intended as a workbench manual of how to tackle thin cap and associated issues. The module on thin cap legislation and principles at INTM540000 should cover theoretical background.
The material is written to advise technically-trained people, “tax professionals”, working within HMRC, many of whom are still referred to as Inspectors, but with an eye to providing explanation and insight to the tax professionals and others with whom HMRC discusses many of the issues. For this reason, the words “you” and “we” are generally avoided, though this leads to an unfortunate reliance on the passive voice.
For loans and interest payments made before 1 April 2004, the legislation at both ICTA88/S209(2)(da) and ICTA88/SCH28AA applied, with S209 providing the basis for most thin cap work. ICTA88/S209(2)(da) was repealed with effect from 1 April 2004, and Sch 28AA was amended. From then on, Schedule 28AA became the basis for financial transfer pricing and brought in UK/UK transfer pricing, so that intra-group interest payments made on or after 1 April 2004 need to be considered not only in a cross-border context but also in relation to UK/UK transactions. This module concentrates on Schedule 28AA.