INTM520100 - Thin capitalisation: practical guidance: creating agreements between HMRC and the group: Example of an agreement: model ATCA - appendix 1 - interest cover ratio
HMRC has issued a model ATCA the body of which is at INTM520090. It is not intended for it to be followed slavishly, but it may serve as a template for many cases and as an aide memoire for the main features which HMRC is likely to expect to see in an agreement.
»Ê¹ÚÌåÓýapp model agreement’s first appendix is as follows:
Appendix 1
| Period ending | For example, EBITDA (or EBITA or EBIT) to Interest |
|---|---|
| 20X1 | b : 1 |
| 20X2 | b : 1 |
| 20X3 | b : 1 |
| 20X4 | b : 1 |
| 20X5 | b : 1 |
Calculation of Disallowance
»Ê¹ÚÌåÓýapp disallowance will be calculated by reference to the ratio shown above for the relevant period (‘the required ratioâ€�) and the interest cover ratio calculated using the actual results of the UK Group (‘the actual ratioâ€�).
Allowable interest is calculated using the following formula:
actual ratio (expressed as a number) x actual interest expense
required ratio (expressed as a number)
Illustrative calculation for period ending 31 December 20X1
Assume the agreement has an EBITDA interest cover covenant of b:1, and the actual figures for the period are an interest charge of £z and a ratio of EBITDA to interest of a:1 which is lower than the required ratio. Allowable interest is therefore calculated as follows:
a x£z (actual interest expense) = £y
b
This results in allowable interest of £y and disallowed interest of £z - £y.