INTM573050 - Thin capitalisation: the Advance Thin Capitalisation Agreement: Presenting an ATCA application - information and analysis

Statement of Practice 04/07 and Revenue & Customs Brief 01/09 put emphasis on the provision of as complete a package of information as possible as part of the application, including where possible a draft agreement or proposed terms. This allows both HM Revenue and Customs and the company to concentrate on important issues and focus on matters of doubt or difficulty. Submission at the outset of a draft agreement (or firm proposals towards one) gives HMRC the opportunity to consider simply accepting the proposals or limiting further work to refining the draft into a mutually acceptable form.

The ATCA process is designed to avoid protracted correspondence. With detailed information presented at the outset, if meetings are necessary they should occur sooner and be more focussed than under the former practice of information gathering through correspondence, so progress should be swifter. There is no reason why HMRC-initiated enquiries taken up on receipt of the CT return should not also follow a similar template, if the parties are agreeable.

It is recommended that the applicant presents the information as comprehensively as possible, to include:

• a description of the financing structure being put in place.
• a description of the trading strategy of the business/company/group.
• copies of loan agreements and other relevant documents.
• a clear indication of the source of the funds (immediate and, if appropriate, ultimate), the purpose for which they were borrowed and any repayment terms.
• a description of the business and the plans of the principal trading operations, showing how capital is allocated and the relationship between capital and cash flows from operations.
• an analysis of the financial strategy of the business, identifying the principle cash flows and the sources of repayment of debt.
• a group structure covering all relevant companies and clearly setting out any changes to the structure taking place over the course of the transactions.
• a summary of contemporaneous financial forecasts, projected for as much of the life of the ATCA as is meaningful, and ideally presenting a realistic range of potential scenarios.
• in the case of an ATCA application, ideally a draft ATCA, but in any case a clear set of proposals for the terms of the agreement.

To enhance HMRC’s understanding of the arrangements presented, the applicant is recommended, where appropriate, to:

• Fully explain the commercial motivations/advantages/pressures of the chosen course of action, both from the UK and the wider group perspective.
• Explain the cost:benefit equation in clear commercial terms.
• Where applicable, try to quantify the actual and predicted benefits of realignment, changed lines of management, synergies, etc, in as concrete terms as is possible.
• Provide a perspective on the risks to the lender - how these are managed.
• Provide an analysis of the risks to the borrower, including the risks of failing to meet the terms of the loan, the possibility of penalties and their effect.
• Describe the borrower’s strategy for managing the debt over the period of the ATCA (and beyond, if relevant), how and when amounts will be repaid, how much is expected to be refinanced at the terminal date, etc.