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Chapter 7
Example 7
Archer plc is UK company, which is a wholly owned subsidiary of Berry Inc, a
company resident in Babylonia.
Archer borrows GBP 100,000 from Berry Inc paying a market rate of interest of
8%. Archer had to borrow from Berry Inc as its UK bankers were not prepared
to lend it more than GBP 60,000.
Required:
Advise Archer plc of how much interest on borrowings it is likely to have
relieved for tax purposes.
Solution
A third party was only prepared to lend Archer plc GBP 60,000.
As it has borrowed GBP 100,000 from its parent company, it is likely that
interest on the excess GBP 40,000 will be disallowed for tax purposes.
Therefore, of the GBP 8,000 interest Archer plc pays to Berry Inc, only GBP
4,800 is likely to be allowed for tax.
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