What does section 187 of TIOPA 2010 do?

Section 187 ensures that when interest paid between connected parties exceeds the arm's length amount, the excess is not taxable as savings income, not subject to withholding tax at source, and does not need to be recognised as a non-trading loan relationship credit. This aligns the recipient's tax treatment with the payer's restricted deduction under transfer pricing rules.

What conditions must be met for section 187 TIOPA 2010 to apply?

Four conditions must all be met: interest must actually be paid under the arrangement, the transfer pricing rules in section 147 must apply, the arm's length interest amount must be less than the actual interest paid or nil, and the recipient must have made a relevant claim under section 174 or section 182 of TIOPA 2010.

How is excess interest above the arm's length amount treated under section 187?

The excess interest is carved out from three specific tax charges. It is not treated as taxable savings income under ITTOIA 2005, it is not subject to income tax deduction at source under ITA 2007, and it does not have to be brought into account as a non-trading loan relationship credit under CTA 2009.

Why is section 187 necessary in the United Kingdom transfer pricing framework?

Without section 187, the full interest actually paid would remain taxable in the recipient's hands, subject to withholding tax, and recognised as a loan relationship credit — even though the payer's deduction was restricted. This would produce an unfair double tax outcome, so section 187 ensures symmetrical treatment between payer and recipient.

Taxation (International and Other Provisions) Act 2010 section 187

Tax treatment if actual interest exceeds arm's length interest

Section 187 deals with the tax treatment of interest payments that exceed the amount which would have been payable under an arm's length arrangement between the parties.

Where interest paid between connected parties exceeds the arm's length amount, the excess receives special tax treatment to prevent unfair consequences.
The excess interest is not taxable as income under the savings income rules (ITTOIA 2005), is not subject to withholding tax at source (ITA 2007), and does not need to be recognised as a non-trading credit under the loan relationships rules (CTA 2009).
These provisions only apply where the transfer pricing rules under section 147 are engaged and the recipient of the interest has made a claim under section 174 or a section 182 claim.
The arm's length interest amount may be less than the actual interest paid, or it may be nil if no interest would have been payable at arm's length.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member