BKM208200 - Bank compensation restriction: qualifying company: arm’s length arrangements: overview

The qualifying company rule (BKM208100) ensures that a banking group cannot avoid the compensation restriction by routing compensation payments around the group. Without a special rule this would deny a deduction for a company that paid the compensation and recharged this expense to the qualifying company. This would mean that deductions relating to the same compensation expense would be disallowed twice.

This is addressed by the arm’s length provision at CTA09/S133A(4) which says that the qualifying company rule does not apply when there is an arm’s length arrangement between the two companies.

Arm’s length arrangements could take many different forms – see below for examples of how this rule applies in practice.

Example A: Centralisation of payment in a group entity

Banking Group ABC contains two banking companies, A and B, with relevant compensation. C is the group Treasury company, which has agreed to make the payments to customers for reasons of convenience. C recharges A and B for the cost of the compensation payments, under an arm’s length agreement.

Here, A and B would be denied a tax deduction for their recharge payments, because they are expenses in respect of amounts of relevant compensation, even though the compensation is ultimately paid by C. Without CTA09/S133A(4) C would also be denied a deduction as C is associated to A and B, which are qualifying companies. However, as the recharge is an arm’s length arrangement CTA09/S133A(4) prevents this and ensures that the compensation expense is only disallowed once.

Example B: In-house claims-management company

Banking Group BCD has two banking companies, B and C, with potential compensation claims. BCD decides to set up a new company, D, to investigate the claims and pay out to customers as appropriate. D recharges B and C for their share of the claims.

As with the previous example the two banking companies B and C get no deduction, but D is allowed the expenses. However, it is likely that the recharges from D to B and C will include a reimbursement for administrative expenses and this part of the recharge is not disallowed.