Income Tax: Deduction of tax: Payments made on or after 1 April 2001
Where on or after 1 April 2001:
- a company, or a partnership if any member of the partnership is a company
and also, on or after 1 October 2002:
- a local authority, or
- a partnership if any member of the partnership is a local authority
makes payments of the types listed below and reasonably believes that the recipient is within one of the categories also listed below the obligation to deduct tax is removed.
Types of payment
The payments concerned are payments that fall within ITA07/S930 (2), namely:
- yearly interest
- annual payments
- dividend or interest on securities issued by building societies
- patent royalties
- royalty payments whose owner lives abroad
- proceeds of sale of UK patent rights to non-UK resident
- manufactured interest
- exempt distributions.
Categories of recipient
The categories of recipient in what is now ITA07/PART15/CHAPTER11 are, from 1 April 2001:
- a UK resident company (section 933)
- a partnership all of whose members are UK resident companies (section 937, but see below for extension from 1 October 2002)
- a UK permanent establishment of an overseas company that brings the income in as part of UK taxable profits (section 934).
The categories were extended by FA02 to include from 1 October 2002 payments to:
- specified tax exempt bodies, such as a local authority, health service body or charity - the full list is at ITA07/S936
- a manager (or manager’s nominee) of a PEP or ISA and the payment is in respect of the plan investments (section 935)
- a society or institution with whom TESSAs may be held and the payment is in respect of the TESSA investments - this exemption was repealed for payments after 5 April 2005 (income tax) and accounting periods ending after 5 April 2005 (corporation tax)
- a partnership, each member of which is, by virtue of ITA07/S937 (3), either
- (a) an exempt body as listed within ITA07/S936, or
(b) a company which is either
- resident in the UK (section 937(4)) or
- a non-resident company trading in the UK through a permanent establishment in partnership whose share attributable to the non-resident company is liable to CT (section 937(5))
- the European Investment Fund (section 937(6)).
The ‘reasonable belief’ test enables the payer to pay gross even when it is not in a position to know beyond doubt the status of the recipient. The payer can therefore act on the basis of assurances given by the recipient or by an intermediary if it considers these assurances to be sufficient grounds for reasonable belief.
Care should be taken not to breach duties of confidentiality if asked by the payer for confirmation that the recipient is within one of these categories. The position of the recipient may change and in the case of a UK branch of an overseas company it will be difficult to confirm that the sum will be taken into account when computing the branch profits. This may make it difficult for HMRC to give any guidance to companies. In such circumstances they may wish to seek any assurances from the recipient directly.
Where it is ultimately found that the recipient was not entitled to receive the payment gross HMRC retains the right to recover the IT which should have been deducted: see ITA07/S938. In this event the normal provisions of ITA07/S874 onwards and ITA07//PART15/CHAPTER15 will apply. See CTM35210.
In a case where the company does not believe that the conditions specified are satisfied but proceeds to make the payment gross, or where the belief is clearly unreasonable then a penalty under TMA70/S98 may be appropriate.
FA02/S95 extended the exemptions from the requirement to deduct tax to include payments by persons authorised for the purposes of the Financial Services and Markets Act 2000 whose business consists wholly or mainly of dealing in financial instruments. Such persons need not deduct tax from yearly interest paid in the ordinary course of business: ITA07/S885.
FA05 included alternative finance payments in what is now ITA07/S874, treating them in the same way as interest, including for the purpose of applying exemptions as described above and in CTM35210. These provisions apply to payments made under alternative finance arrangements entered into on or after 6 April 2005, and to payments of profit share return under existing profit share arrangements if the payment is made on or after 6 April 2005. CFM44000 onwards gives further information on alternative finance payments.
Transfer pricing and deduction of tax
From 1 April 2004 interest disallowed under the transfer pricing rules is no longer re-characterised as a distribution but retains its character as interest. Consequently the deduction of tax rules continue to apply to the interest disallowed subject to any compensating payment. Further guidance is at INTM413000.