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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: deduction of tax: interest paid in the ordinary course of banking business

Interest paid in the ordinary course of banking business

If a bank pays short interest, other than on a relevant investment (see CFM75050), it does not have to deduct income tax.

If it pays yearly interest, and the interest is not being paid on a relevant deposit, the bank might still potentially be obliged to deduct tax under ITA07/PT15/CH3. However, ITA07/S878 provides an exemption for interest paid by a bank in the ordinary course of its business.

Example

A Canadian company places surplus funds on a long-term deposit with a UK bank. This is not a relevant deposit, so ITA07/PT15/CH2 does not apply. Nevertheless, since the company’s place of abode is outside the UK, ITA07/PT15/CH3 would normally oblige a UK payer of interest to deduct tax (unless clearance had been obtained to pay the interest gross under the Double Taxation Treaty between the UK and Canada). Since, however, the interest is being paid by a bank in the ordinary course of its business, the obligation to deduct tax is switched off.

’Bank’ takes its meaning from ITA07/S991 - see CFM14060.

Statement of Practice 4/96

HMRC’s view, set out in Statement of Practice 4/96, is that any yearly interest paid by a bank is paid within the ordinary course of its business, unless the interest falls within one of two defined circumstances.

  • The interest is not regarded as paid in the ordinary course of business where the borrowing relates to the capital structure of the bank. Borrowing relates to the capital structure if it is within the definitions of Tier 1, 2 or 3 capital adopted by the Bank of England, whether or not it actually counts towards Tier 1, 2 or 3 capital for regulatory purposes.
  • Interest is not paid in the ordinary course of business where the transaction giving rise to the interest is primarily attributable to an intention to avoid UK tax. CTIAA (Financial Products Team) will advise in any case where HMRC staff believe that this paragraph of the Statement of Practice may be in point.