Interest: disguised interest: overview
Finance Act 2013 introduced income tax legislation on disguised interest (FA13/S28 and SCH12). This legislation is now to be found in ITTOIA05/PT4/CH2A. The legislation is broadly modelled on the equivalent provisions for corporation tax purposes, which are to be found at CTA09/PT6/CH2A, and on which guidance is at CFM42000.
Interaction between disguised interest and similar provisions
ITTTOIA05/PT4/CH2A applies only to amounts that are not charged to income tax under any other provision. So where an amount is taxed as savings and investment income under any other chapter of ITTOIA05/PT4 (for example, as dividends or other types of distribution under Chapters 3 to 6), or under another provision that imposes an income tax charge on an interest-like return, that other provision takes priority.
Other provisions that tax interest-like returns as income include:
- ITA07/PT10A - Alternative Finance Arrangements
- ITA07/PT12 - Accrued Income Profits and Losses
The following legislation that taxes arrangements that are in the nature of disguised interest was repealed, with effect from 6 April 2013, as a consequence of the introduction of the ITTOIA05/PT4/CH2A:
- Guaranteed returns from the disposal of futures and options (ITTOIA05/PT4/CH12 - see SAIM7000).
- Manufactured payments and repos (certain sections of ITA07/PT11).
SAIM2820 explains the transitional rules.
Any exemptions that apply to interest apply equally to disguised interest. SAIM2300 onwards explains the exemptions from the tax charge on interest.
Deduction of tax
The disguised interest provisions apply to interest-like returns. Amounts taxed as income under ITTOIA05/PT4/CH2A are not interest for the purposes of the income tax rules on deduction of tax (SAIM9000), and income tax is not required to be deducted from disguised interest.