INTM582080 - Thin capitalisation: agreements between HM Revenue & Customs and the group: Monitoring conditions

A thin capitalisation agreement should state explicitly what the company will need to do each year to fulfil the monitoring conditions. If a computation is required, it might be helpful to both sides to agree the form which that will take, and perhaps attach the format as an appendix to the agreement.

Among the points to be included are:

• frequency of monitoring - Where very large loans are involved, third-party lenders would be likely to set quarterly monitoring requirements. This is generally impractical and onerous for HM Revenue & Customs but it could be considered in appropriate cases. Alternatively, monitoring might extend to the annual reporting of monthly or quarterly figures, perhaps with a condition that HMRC be alerted if there is a problem at a month or quarter end. More usually, the expectation is that a computation or report will be made at the time of the annual CT return, though again with the proviso that early notice should be given where a problem such as a breach of the agreement is anticipated or experienced.
• form of the monitoring - this should include a statement accompanying the corporation tax return demonstrating how the covenants have been complied with, or the extent to which they have been breached. The tax return should also detail where an adjustment has been made to rectify the breach. The onus should be on the signatory company to certify that conditions have been met.
• a practical example of any complex calculations which are to be submitted
• A statement of the obligation to inform the office dealing with the agreement as soon as a breach becomes apparent.