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HMRC internal manual

Company Taxation Manual

Particular bodies: local authorities: income tax deducted from payments made

Since 1991 local authorities have had to account under two different regimes for taxdeducted from interest and certain other payments made.

ICTA88/S349 and ICTA88/S350

Local authorities are not within the Taxes Acts definition of a company at ICTA88/S832(1). Unless the payment falls within the tax deduction scheme for interest (TDSI) scheme(covered below), IT deducted under ICTA88/S349 should therefore be collected by way ofassessment under ICTA88/S350 rather than under the ICTA88/SCH16 form CT61 procedure. AnySection 350 assessments should be made from an IT file. Local authorities are not howeverwithin ITSA. As such, the file should be set up under clerical control. The file should beset up by the office which processes assessments or repayments for the geographical areain which the authority is situated, or, if the authority operates from a number of sites,the area in which its main office is situated.

Assessments under Section 350 should be made under the SA facility - see CO3150 onwards.Details of the form of assessment to be raised are at AP160. The procedure to be followedis as follows.

The authority should be asked to submit details of any Section 349 liability as soon aspossible following the end of the tax year to 5 April. If the information has not beenprovided within a reasonable period (normally, by the following 31 May) you should raisean estimated assessment.

The assessment should be made in the full amount of the interest etc paid or estimated tobe paid under deduction of tax by the authority, a deduction being made of the ITsuffered, or estimated to have been suffered, at source.

Assessments under Section 350 issued after 31 January 2001 for 1999-2000 and later yearscarry interest under TMA70/S86 where the payment of IT is made after 31 January followingthe end of the year of assessment. Section 350 assessments for the years 1998-99 andearlier, issued at any time, and assessments for 1999-2000 and 2000-01 issued on or before31 January 2001, do not carry S86 interest.

Tax deduction scheme for interest

Local Authorities were brought within the TDSI, in respect of interest paid or creditedon ‘relevant deposits’ on or after 6 April 1991, by ICTA88/S481 (2)(ca).

Local authorities paying interest on ‘relevant deposits’ under TDSI have to complete formsCT61 as if they were a company. This is because ICTA88/S480A (3) applies ICTA88/SCH16 toall deposit takers regardless of whether or not they are a company for tax purposes.

Where a local authority pays interest on relevant deposits under the TDSI scheme a CT filewill be required solely to deal with the issue of forms CT61. You should note that, inpractice, the majority of local authorities are not involved in raising finance fromindividuals in this way.

Note also that ICTA88/S480A (4)(a) amends ICTA88/SCH16 for those deposit takers (such aslocal authorities) that are not companies. Importantly, it disapplies ICTA88/SCH16/PARA5so that a local authority is not entitled to set off tax suffered on interest receivedagainst its liability to deduct tax on interest paid. Thus IT suffered can only be set offagainst tax due under ICTA88/S349, or repaid.

(Note that CTM40870 gives guidance on circumstances in whichtax need not be deducted from payments of interest etc by local authorities.)

Treatment of tax credits

Local authorities were entitled to payment of tax credits attached to dividends from UKcompanies for periods prior to 6 April 1999.

They are not entitled to payment of such tax credits arising on or after 6 April 1999following changes made to ICTA88/S231 (3) by F2A97/S30 (5).