OT22001 - Interest and Financing

Introduction

Commercial textbooks on corporate financing cover in depth the need to reward shareholders by paying adequate dividends, but also cover the further need to retain funds for future development and to limit borrowing. However, particularly where a UK company or sub-group may be part of a wider international corporate whole, manipulation of debt and potential interest deductions are highly attractive mechanisms to the tax planner. In the case of the oil industry in substance profits may be transferred across national boundaries, or the oil ring fence may be breached, or both. It may be possible to attempt to exploit not only group structure but any variations in the treatment of particular transactions between one national tax regime and another regime.

As far back as late 1972 the document which became Annex 12 to the Public Accounts Committee Report about oil taxation ( OT00110 / OT00130) recognised that financing would impact on profitability and exchequer revenue. The Committee commented in Paragraph 51 of the eventual Report. During debate on what became OTA 1975 Ministers steering the legislation flagged up concerns (for example, Hansard 19 March 1975 Col1795). In view of these concerns the Oil Taxation Office has always, where appropriate, looked closely at financing arrangements. From 1975 consideration of whether interest may properly be deducted, particularly within the ring fence, has been seen as part of the wider arrangements for protecting North Sea profits from undue erosion.

OTO will be alive to the possibility that where there are involved and/or interconnecting arrangements they will not all necessarily be neatly within one accounting period. To properly understand a transaction or series of transactions or arrangements it may be necessary to look at several periods and to ask for backup information and documentation. Significant transactions may take place shortly after a balance sheet date so that balance sheet numbers are not necessarily entirely representative.

There will be a need to seek further information where the terms of any borrowing, for whatever reason, appear at first sight to be unreasonable. The grounds for concern may include the rate of interest, and/or the length of a loan, and/or the way in which overall financing appears to be structured, and/or other factors. The Inspector would not attempt to come to any conclusions until he/she is conversant with the Company's explanations for the particular financing arrangements.

It is reasonable to make an initial assumption that borrowing is commercial. However, the assumption may be displaced by unusual or special facts. The aim is to discriminate between the clearly acceptable and borrowing which will require further explanation and investigation to see whether any of the statutory provisions referred to in OT22005 etc are in issue.

When and where new financial arrangements are intended customers can approach OTO under the established clearance procedures.