INTM512050 - Thin capitalisation: practical guidance: the Advance Thin Capitalisation Agreement process: presenting an ATCA application - information and analysis
Statement of Practice 01/12 emphasises the importance of providing a complete package of information as part of the application, including either a draft agreement or the proposed terms. This is a legal requirement under the APA legislation (TIOPA2010/S223) and of practical advantage to both parties, since it allows both parties to focus on areas of doubt or disagreement. This also means that HMRC has the option of accepting the draft as submitted or asking only for limited changes.
The ATCA process is designed to avoid protracted correspondence, for which thin cap is particularly unsuitable. Detailed information should be presented with the application, with any further discussions conducted through meetings and telephone discussions; these should occur sooner and be more focussed than under the former practice of information gathering through correspondence.
Thin cap enquiries taken up on receipt of the CT return should as far as possible follow a similar template.
It is recommended that the applicant presents the information as comprehensively as possible, to include:
- a description of the financing structure being put in place, setting the context within which it has come into being.
- a description of the trading strategy of the business/company/group.
- copies of loan agreements and other relevant documents.
- a clear identification of the source of the funds, outlining the purpose for which they were borrowed and any repayment terms.
- a description of the business, and the plans of the principal trading operations, showing how capital is allocated and the relationship between capital and cash flows from operations.
- an analysis of the financial strategy of the business, identifying the principal cash flows and the sources of repayment of debt.
- a group structure covering all companies playing any part in the trading activities, funding and control of the borrower(s), and clearly setting out any changes to the structure taking place over the course of the transactions.
- a summary of contemporaneous financial forecasts, identifying their source and purpose, projected for the proposed life of the ATCA, and ideally presenting a realistic range of potential outcomes.
- a draft ATCA, or a clear set of proposals for one, as required by TIOPA10/S223.
To enhance HMRC’s understanding of the arrangements presented, the applicant is recommended, where appropriate, to:
- fully explain the commercial motivations/advantages/pressures of the chosen course of action, both from the UK and the wider group perspective.
- explain in clear commercial terms how the expected benefits to the UK justify the costs.
- where applicable, quantify the actual and predicted benefits of the object of the funding: assets, income streams, realignment, etc, in as concrete terms as is possible.
- assess the degree of risk attaching to the loan.
- describe the borrower’s strategy for managing the debt, both interest and principal, over the period of the ATCA (and beyond, if relevant); how and when amounts will be repaid; how much is expected to be refinanced at the terminal date, etc.