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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: deduction of tax: introduction

Deduction of tax: overview

UK resident companies have a general obligation under ITA07/PT15/CH3 to deduct income tax from payments of yearly interest that they make (otherwise than as nominees or representatives of someone else). This obligation, however, was substantially qualified by changes to the deduction of tax rules made in FA01 and FA02. If the company reasonably believes that the recipient of the interest falls into one of the prescribed categories - which include UK resident companies - the obligation to deduct tax is switched off.

See the Company Taxation Manual (CTM35000) for more on the rules on the deduction of tax by companies, and the Savings and Investment Manual (SAIM9000) for more on deduction of tax generally.

This section of the Corporate Finance Manual sets out the modifications of the general rules for banks, building societies and other deposit takers. The modifications fall into two areas.

  • Under the Tax Deduction Scheme for Interest (TDSI), banks, building societies and other deposit takers must deduct tax from interest paid on all ’relevant investments’, unless they hold a completed form R85. The main provisions of the TDSI are outlined at CFM75020 onwards.
  • ITA09/S878 provides that interest paid by a bank, building society or deposit taker in the ordinary course of its business is payable without deduction of tax. This includes interest paid on deposits that are not ‘relevant investments’ and therefore do not come within TDSI.


  • an interest payment is made by a company that is a member of a banking group, but not itself a bank, or
  • a bank pays interest outside of the normal course of banking business, or
  • a bank pays an annuity or makes an annual payment,

you will need to consider the general rules on deduction of tax. The relevant guidance is at CTM35210 onwards.

There is a further exemption at ITA07/S879 relating to interest payable on an advance from a bank (CFM75100).

‘Bank’, for the purposes of ITA07/S878, is defined in ITA07/S991.