INTM572020 - Thin capitalisation: an overview of thin cap work: End of link between treaty clearance and thin capitalisation
For treaty clearance applications lodged with HMRC’s Charity Assets & Residence (“CAR”) up to and on 21st March 2007, CAR would refer the matter to the Large Business Service or Local Compliance Office asking for a recommendation as to whether to grant treaty clearance allowing the lender to receive interest from the borrower subject to a lower or nil rate of withholding tax. This in some cases led to an enquiry by the CT caseworkers or international specialists at the LBS, Local Compliance or Business International into whether the UK borrower was funded on an arm’s length basis, i.e. a thin cap enquiry. Any recommendation would be delayed until this enquiry was concluded.
For applications lodged from 22 March 2007 onwards, CAR, now superseded by the DT Treaty Team at LBS Nottingham will enquire into the bona fides of the treaty application, considering in appropriate cases such issues as the lender’s beneficial ownership of the interest income (guidance on beneficial ownership starts at INTM332000). They will do this without referral to the office responsible for the borrower’s Corporation Tax affairs, unless they are exceptionally seeking assistance with those treaty-linked enquiries.
The treaty team will notify the CT office of the outcome of the treaty application, but there will be no opportunity to raise thin cap enquiries until the return comes in for the period containing the transactions in question, unless the borrower wishes to enter into a thin cap forward agreement under the ATCA process (INTM573000).
The treaty team will grant clearance to pay interest subject to the treaty rate of withholding tax if they are satisfied that the application is in order, without considering the application of the arm’s length principle to the borrower’s finances. Clearance, when it is given, will be on a “process now, check later” basis, without prejudice to any later enquiries on corporation tax issues. This is explained in more detail in the chapter starting at INTM574000.
