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INTM574040 - Thin capitalisation: treaty clearances: HM Revenue & Customs practice where treaty clearance was held up by thin cap issues

This practice relates to treaty applications to Charity, Assets & Residence (CAR) made on or before 21st March 2007 Their role in treaty clearances has now been taken over by the DT Treaty Team at LBS Nottingham. As this page largely relates to the past, references to CAR are retained.

No UK company paying interest to someone overseas may assume that it can pay the interest gross, or at a reduced treaty rate, until it receives treaty clearance from the CAR, unless the loan is in the form such that withholding tax is not applicable, a quoted Eurobond or discounted loan, for instance. CAR will normally act upon the recommendation of the caseworker working a thin capitalisation case. However, HM Revenue & Customs has, under its collection and management powers, adopted a practice to smooth the process. Subject to the points made in INTM574020, the main elements of this practice are:

  • Between the date of receipt of a certified application for treaty clearance and the date that the treaty claim is finally determined, it is open to the caseworker to come to a view, based upon the information available, as to the amount of the loan that could have been obtained, and would have been obtained, at arm’s length ('the arm’s length amount').
  • The arm’s length amount will be clearly notified to the interest payer.
  • The caseworker may then recommend to CAR that treaty clearance be given for an amount of interest corresponding to the arm’s length amount.
  • Alternatively, and to reduce the duplication of work in issuing treaty clearance, the caseworker may notify the interest payer in writing of the amount of interest that can be paid gross without asking CAR for a formal clearance.
  • Any remaining interest must have tax withheld from it and paid to HMRC.
  • If the remaining interest is paid gross, assessments may be made under ICTA88/SCH16 to recover the lost tax, but may be postponed until the claim is finally determined and the position becomes clear, to minimise administrative burdens.
  • If there is a possibility of an assessment being made in this period before the claim is determined, then reference should be made to the Transfer Pricing Team at Business International.
  • If a situation arises whereby an assessment may be made to recover lost tax but it is clear that at a later date the tax will be repayable, then HMRC will recover the interest payable under TMA70/S87 either by contract settlement or by assessment mechanism in such a way as to recover the interest but not the tax, at the agreement of the interest payer.
  • If interest is paid gross without formal or informal clearance, the consequences set out in INTM574030 shall apply.