INTM547030 - Thin capitalisation: financial transactions - ICTA88/SCH28AA

Applies where interest is excessive for whatever reason

ICTA88/SCH28AA replaces the legislation at ICTA/S770 to ICTA/S773 with effect from 1 July 1999 and expands upon it in an important respect. Under ICTA88/S770 an Inspector could consider only the terms attaching to a particular loan, not whether a particular loan would have been made at all at arm’s length.

Under Schedule 28AA, the Inspector can attack the ‘provision’ itself. ICTA88/SCH28AA/PARA1(3) makes this clear by stating that the Schedule can apply in cases where ‘provision is made or imposed as between any two persons but no provision would have been made between independent enterprises.’

This means that in cases where ICTA88/S209(2)(da) (repealed with effect from 1 April 2004 and replaced by the revised ICTA88/SCH28AA, but continues to apply to payments on interest made before that date) cannot apply, because the requisite shareholding relationship is less than 75%. However, where there is participation as defined in ICTA88/SCH28AA/PARA1, an Inspector can now look at whether a loan would have been made at all, or at what amount may have been loaned, in a particular set of circumstances.

Schedule 28AA can also apply to upstream loans – loans from a subsidiary to a parent - in cases where there is participation as defined in ICTA88/SCH28AA/PARA1.