OT22005 - Interest and Financing

Summary of Statutory Provisions

ICTA88/s494 restricts the deduction of interest against ring fence profits unless the money borrowed is used to meet expenditure incurred in carrying on oil extraction activities or in acquiring oil rights other than from a connected person, or is appropriated to meet such expenditure. These restrictions apply whether the borrowing is from an associate or not.

S494 also imposes various other restrictions on ring fence interest deductions, including a restriction on interest paid to an associated company at more than a commercial rate. Interest at more than a commercial rate may also be disallowable under the transfer pricing rules and/or fall to be treated as a distribution under ICTA88/s209(2)(d), which would result in the interest being disallowed altogether and not just against ring fence profits.

Section 494 ICTA 1988, which was originally OTA 75/s15, is applicable only to a company with ring fence profits.

Possible thin capitalisation may also have to be considered. In CTSA periods the transfer pricing rules in ICTA88/Sch 28AA may restrict interest deductions. If the borrowing is from an overseas associate in a 75% relationship, interest on non-arm’s length borrowing may fall to be treated as a distribution under ICTA88/s209(2)(e)(iv) or s209(2)(da).

Where borrowing is from a non UK company it may also be necessary to consider other relevant provisions, including

• ICTA88/s349 - withholding tax (subject to the provisions of the relevant DTA)
• ICTA88/s209(2)(e)(iii) – consideration dependent on results – and (vii) – equity notes.