INTM513020 - Thin capitalisation: practical guidance: opening a case: gathering preliminary information

Whether the case arises from an application for an Advance Thin Capitalisation Agreement (“ATCA”) or as a post-return enquiry, similar information will be required for a proper examination of the issues.

Statement of Practice 01/12 and the accompanying Model ATCA (INTM520090) give guidance to companies on the kind of information which should be included in a well-constructed ATCA application (see also INTM512000 onwards), and these documents would serve as a checklist for a post-return enquiry. Relevant information should be gathered as comprehensively as possible, as appropriate to the case.

There is a list at INTM512050 of the sorts of information which the applicant should provide when submitting the application.

Judgement should be exercised when requesting information, either in enquiry or ATCA work. Documents such as loan agreements, diagrams indicating changes in group structure, and forecasts are essential at an early stage, and should form part of the ATCA application, but there may be supplementary information, perhaps highlighting specific vulnerable areas identified upon review of the application, which it would be better to discuss first, face-to-face with the people involved, before formulating a request.

While further information may be key to understanding the transactions and the financial position of the borrower, specific information requests are preferable to all-embracing ones, and their relevance should be demonstrable. If the initial ATCA “information pack” is inadequate, see the advice at INTM512050.

Background information

This is material not necessarily provided by the applicant, but which may be helpful

  • Papers on previous thin cap enquiries or ATCA negotiations, including any current or recently expired thin cap agreement and a record of any breaches of that agreement.
  • Domestic and overseas returns for other companies in the group, particularly intermediate and ultimate parent companies and those with whom the company has transactions, such as overseas treasury companies.
  • “Glossy” accounts, news, history, etc, from group websites and commercial databases some of which hold facsimiles of filed accounts and other Companies House material. These may give indications about the function and relative importance of the company within the global group, its place within its industry, and how it is financed. Websites and databases can provide information about the group’s presence in low tax jurisdictions. These territories tend not to have double taxation agreements with the UK, so finance sourced from a low tax territory may be routed via another territory in order to obtain relief from withholding tax. The same may be the case where finance originates in a territory like Canada or Belgium, where interest arising from direct investment into the UK may be subject to a residual rate of withholding tax (usually 10%) even after treaty relief. It may be possible to challenge indirect routes on the grounds that the intermediate or conduit company does not have beneficial ownership of the income in question. The object of such a challenge would be to recover and retain the withholding tax on interest paid. See INTM504000.
  • Information from public sources, including the internet, on major mergers and acquisitions. There may be useful background and commentary from industry watchers, including discussion of the means by which groups have gone about major transactions. If the funding relates to a significant merger or acquisition, there will be information about who in fact took over whom, how the transition was undertaken (whether by share exchange, for cash, or a mixture), and how observers view post-transaction prospects. Of course facts are sacred and comment is not.

A particular source of useful information is the Edgar Database (US Securities & Exchange Commission site), which makes publicly available the full text of US corporations’ filings. The 10-K annual return is very detailed and can be very informative on the structure and activities of US-owned groups, and the financing policies and structure of the global group. The site may be accessed, free, at: http://www.sec.gov/edgar/searchedgar/webusers.htm.

A 10-K annual return may be a mine of information but it may also be 150 pages long. It is easier to search onscreen (CTRL + F brings up the Find box) and print relevant pages; the document can be saved in pdf form for future reference.

Canada’s SEDAR site offers similar access to documents filed by public companies.