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HMRC internal manual

Savings and Investment Manual

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Deduction of tax: ‘deposit takers’: bank and building society interest

Interest etc. paid by ‘deposit takers’

ITA07/S850 to S873 in Chapter 2 of Part 15 ITA07 set out the duty on ‘deposit takers’ and building societies to deduct tax from interest and other payments on ‘relevant investments’. ‘Interest’ includes building society ‘dividends’ (ITA07/S850 (6) and see also SAIM2200).

‘Deposit takers’ include banks, but not building societies, Friendly Societies, Industrial or Provident Societies or insurance companies. The term also includes local authorities (SAIM9035), European Economic Area (EEA) firms that have permission to accept deposits under the Financial Services and Markets Act 2000 (FISMA 2000), and other persons including individuals and professional firms who have permission under FISMA 2000 to accept deposits. ITA07/S854 gives the Treasury powers to prescribe who is a deposit taker.

A ‘deposit’ is a sum of money paid on terms which mean that it will be repaid, with or without interest, either on demand or as agreed between the parties (ITA07/S855 (2). However, the obligation to deduct tax only arises where interest is paid (ITA07/S851 (2))

‘Relevant investments’ are deposits with deposit takers and building societies, shares in and loans to building societies, held by individuals, Scottish partnerships, personal representatives and trustees. In other words, the term excludes investments held by companies, which are covered by the loan relationships legislation (see the Corporate Finance Manual CFM500). ‘Relevant investments’ include ‘alternative finance’ arrangements, by virtue of FA05/SCH2/PARA6 (SAIM2250).

Note that for banks, the normal rule is that there is no requirement to deduct tax from yearly interest paid in the ordinary course of its banking business (see SAIM9070), but this rule is switched off by the requirement to deduct tax from ‘relevant investments’.

Banks and building societies deduct tax under regulations referred to as the ‘tax deduction scheme for interest’ (TDSI). See SAIM9030.

Not all investments are ‘relevant investments’

Not all investments are ‘relevant investments’. In order to be a ‘relevant investment’ there must be a deposit, and unless there is a deposit there is no obligation to deduct tax. For example, certain types of payment made by local authorities do not involve a deposit (SAIM9035).

In addition, certain types of deposit are specifically excluded from being ‘relevant investments’. These include

  • general client accounts (ITA07/S863) - undesignated client accounts (where monies relating to a funds of a number of clients are pooled) as distinct from designated client accounts where the interest may be received gross or net and is simply passed on gross or net to the client (see BIM65805 in relation to solicitors’ accounts)certain types of deposit rights, including certificates of deposit (SAIM2510) (ITA07/S865);
  • qualifying time deposits (ITA07/S866) - deposits of at least £50,000 of up to 5 years;
  • Lloyd’s premium trust funds (ITA07/S867) (see the Lloyd’s Manual LLM1000 SAIM20000);
  • investments held outside the UK (ITA07/S868);
  • repos (ITA07/S869) (see CFM17150);
  • investments by deposit takers, etc., with other deposit takers, etc (ITA07/S870).

EU Interest and Royalties Directive

Under the EU Interest and Royalties Directive certain payments of interest from deposit-takers within the EU can be made gross without any deduction for withholding tax. For more information please refer to INTM400000.