INTM571010 - Thin capitalisation: practical guidance - introduction

The aims of this module

The main aim of this module is to provide some practical guidance on working thin capitalisation cases. Using the information provided, in conjunction with the acquisition of expertise over a period of time, should enable caseworkers to work most cases to a conclusion.

This module assumes that the reader is familiar with the UK legislation relating to thin capitalisation and the general principles of its interaction with the double taxation agreements that the UK has with other countries. The Thin Capitalisation (legislation and principles) module of this guidance - from INTM540000 onwards - deal with those points.

The UK approach to thin capitalisation is that it is a case of applying the arm’s length principle to a particular type of transfer pricing. The legislation at ICTA88/SCH28AA/PARA2 requires that Schedule 28AA should be construed in line with Article 9 of the OECD Model Tax Convention on Income and on Capital and with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. This module aims to outline the HM Revenue & Customs approach to putting the legislation into practice.

For loans and interest payments made before 1 April 2004 the legislation at both ICTA88/S209(2)(da) and ICTA88/SCH28AA applied. ICTA88/S209(2)(da) was repealed from 1 April 2004, and intra-group interest payments made on or after 1 April 2004 need to be considered in respect of UK/UK intra-group funding in the light of ICTA88/SCH28AA/PARA1.