INTM579070 - Thin capitalisation: debt: equity ratio

Groups or companies in expansion mode

Historically in the UK it is very difficult to obtain finance for completely new business ventures. Experience has shown, however, that third-party lenders are prepared to tolerate debt:equity ratios in excess of the normal for a business that is expanding, but with some conditions:

• The borrowing business must be soundly financed in the first place and demonstrably capable of servicing its debts. It should have a business plan that includes reasonable projections for profits over at least the life of the loan, and the underlying assumptions of the plan should be reasonable.
• It should have a clear idea of how it intends to reduce the debt:equity ratio over a reasonable period of time, normally up to three years. The reduction may either be by the introduction of more equity or by the retirement of some of the debt, or a combination of both.

Given that a third-party lender is prepared to do this, HM Revenue & Customs will discuss with UK groups the way in which the principle can be incorporated into a thin capitalisation agreement – see INTM579080.