INTM582100 - Thin capitalisation: agreements between HM Revenue & Customs and the group: Example of an agreement: Model ATCA -appendix 1 - interest cover ratio

HM Revenue & Customs has issued a “Model ATCA”, the body of which is at INTM582100. It is not intended to be followed slavishly, but may serve as a template for straightforward cases and an aide memoire as to the main features which HMRC is likely to expect. The first appendix to the model follows here:

Appendix 1

Calculation of Disallowance

The disallowance will be calculated by reference to the ratio shown above for the relevant period (‘the required ratio’) and the interest cover ratio calculated using the actual results of the UK Group (‘the actual ratio’).

The allowable interest can be calculated using the following formula;

Illustrative calculation for period ending 31 December 2006

Assume that the interest charge is £z. This gives an actual ratio of EBITDA, EBITA or EBIT to interest of X : 1 which is lower than the required ratio of Y : 1. Applying the above formula gives the following result;