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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: advances by a bank

Advances by a bank

The exemption at ITA07/S875 applies to interest paid by a bank. There is a further exemption at ITA07/S879 that applies in certain circumstances where interest is paid to a bank.

The obligation under ITA09/S874 to deduct tax is switched off if:

  • it is payable on an advance from a bank, and
  • at the time when the interest is payable, the person entitled to the interest is within the charge to corporation tax as respects the interest.

‘Bank’ is defined at ITA07/S991 (CFM14060). The person entitled to the interest does not have to be the bank that first made the advance: ITA07/S879 will continue to apply even if the bank assigns the loan to a UK company that is not a bank.

This provision assumes much less importance for interest paid by a company, or a partnership whose members include a company, on or after 1 April 2001. From that date, there is no obligation to deduct tax where the payer reasonably believes the person entitled to the interest to be a company resident in the UK. Similarly, payment can be made gross if there is a reasonable belief that the interest is being brought into charge to corporation tax by a UK permanent establishment of a non-resident company. These provisions also apply to interest paid by a local authority on or after 1 October 2002.

These relaxations only remove the obligation to deduct tax from yearly interest imposed by ITA07/PT15/CH3 on companies, local authorities and partnerships with company members. They do not apply to the obligation under ITA07/S874(1)(d) to deduct tax from interest paid to non UK residents.

Example

A company incorporated in Italy is recognised as a bank in the UK for the purposes of ITA07/S991.

Its UK branch makes a normal business loan to X Ltd, a UK trading company. Since the bank’s normal place of abode is outside the UK, X Ltd has to consider whether it should deduct tax from the interest payments under ITA07/S874. However, since the advance was made by a bank, and the interest is being paid to its UK branch, which is within the charge to CT in respect of the interest, X Ltd is able to pay the interest gross by virtue of ITA09/PT15/CH11.

If the Italian company ceased to be a bank within the meaning of ITA07/S991, X Ltd would require authorisation under the relevant Double Taxation Treaty in order to continue paying the interest gross.