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Third-party debt agreements will typically specify the interest rate charged on debt, and if it is a 鈥渇loating鈥� rate loan it will be calculated by reference to a formula. One of the simplest formulae is based on SONIA (see INTM516035) or other reference rate, plus a margin. But a more complicated formulation may apply over the term of the debt. This will depend on the financial performance of the borrower over the debt period. The 鈥減lus鈥� element may also vary for the same reasons. Similarly, some debt agreements, whether third-party or not, contain a penalty clause bringing in a higher interest rate in the event of the borrower鈥檚 failure to make debt repayments on time.

Arrangement Fees

These fees relate to specific types of debt only , for example, 鈥渟yndicated credit facilities鈥� or other similar senior ranking debt.

In these specific forms of debt, along with the interest charged on debt, third-party lenders may make an additional charge for arranging debt, and these fees may also be charged by connected lenders.

Arrangement fees represent items such as legal and other expenses actually incurred by the lender in drawing up debt documents. Arrangement fees should be seen as part of the finance cost incurred by a borrower, and should therefore be added to the interest charge and other similar costs in order to assess whether the total finance cost amounts to an arm鈥檚 length price.

Arrangement fees may also be susceptible to challenge under CTA09/S54 as being not wholly and exclusively for the purposes of the trade.

Facility Fees

Another charge levied by third-party lenders, over and above the interest charge, is the credit facility fees.

These fees relate only to those debt structures that are specifically credit facilities, for example, a revolving credit facility or other similar senior ranking debt.

For example, a lender may grant a revolving credit facility of 拢100m. If the borrower draws only 拢60m, a small fee may be payable to the lender for continuing to hold the remaining 拢40m available within the notice period specified by the agreement, even though it is not currently required. Such fees are significantly smaller than the interest rate, and are allowable tax deductions where lender and borrower are not connected, as part of finance costs. If such a charge is made between connected persons, you should establish whether the charge is justifiable. The same considerations apply as for arrangement fees above, as they do to any other one-off or annual fees of a similar nature (see INTM520020 on connected party facility fees).

Note that if arm鈥檚 length borrowing has been agreed at a lower amount than the actual total credit facility, then the cost of making available anything above that lower amount will be disallowable as it relates to the provision of non-arm鈥檚 length debt. For example, if it is agreed the arm鈥檚 length amount of the facility should be a maximum of 拢80m, say (continuing the above example), then it may be reasonable to charge a facility fee on the difference between the drawn amount (拢60m) and the agreed maximum (拢80m), but not on the 拢20m from 拢80m-拢100m.

It is in general necessary to consider what the fee was actually for, particularly if it entailed no effort or expense on the part of the connected lender.