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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: funding bonds: deduction of tax

Deduction of tax at source

Where funding bonds are issued by or through a person in the United Kingdom, any obligation to deduct tax at source from interest (for example under ITA07/PT16) applies with modifications. ITA07/S939 tells the issuer how to account for tax. There are two steps.

First, the issuer must ‘retain’ (i.e. withhold) the appropriate proportion of the bonds from the creditor, to represent the income tax deductible. This step is mandatory (unless exceptionally, retention would be impracticable, see CFM37430. Second, the issuer ‘may’ satisfy the tax by tendering the withheld bonds to HMRC. The word ‘may’ means that tendering them is not mandatory, and so the issuer can pay the tax in cash instead. If paid in cash it is still mandatory to withhold bonds from the creditor under step 1.

A valuation of the bonds is needed to determine the amount of interest paid by the funding bond issue and the amount of income tax to be deducted from that interest. Where unquoted shares or securities are involved the advice of Shares & Assets Valuation should be sought in accordance with CG59500 onwards.