Policy paper

Statement of Practice 4 (1996)

Published 13 May 1996

This policy paper was withdrawn on 6 December 2017

Statement of Practice 4 (1996) has been withdrawn because HMRC now accepts that interest on borrowing related to capital structure is also paid in the ordinary course of a bank’s business.

Introduction

1. The Taxes Acts generally require that when yearly interest is paid by a company Income Tax must be deducted on payment. However, this is modified by section 349(3)(b) Income and Corporation Taxes Act (ICTA) when yearly interest is paid by a bank in the ordinary course of business. This Statement of Practice sets out how HM Revenue and Customs (HMRC) applies the test of ‘in the ordinary course of business’ for the purposes of that section.

2. Section 349(3)(b) was amended by Paragraph 3(b) Schedule 37 Finance Act (FA) 1996 and now applies to interest paid by a bank ‘in the ordinary course of its business’.

Meaning of ‘bank’

3. ‘Bank’ for the purposes of section 349(3)(b) has the meaning given by section 840A ICTA 1988.

Interpretation of ‘in the ordinary course of its business’

4. HMRC will accept that yearly interest is paid in the ordinary course of a bank’s business unless that interest falls within one or both of the circumstances set out immediately below.

(i) Yearly interest will not be regarded as paid in the ordinary course of business where the borrowing relates to the capital structure of the bank. A borrowing will be regarded as relating to the capital structure of the bank if it conforms to any of the definitions of tier 1, 2 or 3 capital adopted by the Bank of England, whether or not the borrowing actually counts towards tier 1, 2 or 3 capital for regulatory purposes.

Where, however, a borrowing within the tier 3 definition arose at a time prior to 1 January 1996 (the date when tier 3 capital was introduced for regulatory purposes) and was in the ordinary course of business at the time it arose, yearly interest on that borrowing will continue to be regarded as within section 349(3)(b).

(ii) Yearly interest will not be regarded as paid in the ordinary course of business where the characteristics of the transaction giving rise to the interest are primarily attributable to an intention to avoid UK tax.

Application

5. This statement supersedes Statement of Practice 12 (1991) in relation to yearly interest paid on or after 29 April 1996.

6. Whether or not interest is within the scope of this Statement of Practice depends both on the date of the transaction giving rise to the interest and on whether the bank was also a bank under the pre FA 1996 rules, that is, whether it was recognised by HMRC prior to 29 April 1996 as a bank for the purposes of section 349(3)(b).

Transactions entered into on or after 29 April 1996

6.1 This Statement of Practice applies to all yearly interest paid by the bank on or after 29 April 1996.

Transactions entered into before 29 April 1996

6.2 Where the paying bank was recognised by HMRC prior to 29 April 1996 as a bank for the purposes of section 349(3)(b), this Statement of Practice applies to all yearly interest paid by the bank on or after 29 April 1996. This means that such banks (the majority) will not need to consider whether interest arises on an advance, or whether the bank remains a ‘bank carrying on a bona fide banking business in the UK’ under the pre-FA 1996 rules at the time of payment of the interest.

Where the paying bank was not recognised by HMRC prior to 29 April 1996 as a bank for the purposes of section 349(3)(b), the bank must continue to deduct Income Tax from yearly interest paid on or after 29 April 1996 on advances, as it did from payments made before that date. All other interest paid by the bank, however, on or after 29 April 1996 will be governed by this Statement of Practice.