Deduction of tax: yearly interest
What is yearly interest?
At one time, the tax rules distinguished between ‘short’ interest and ‘yearly’ or annual interest. The distinction is much less important now and is relevant only to the obligation to deduct tax. SAIM9075 explains what is meant by ‘short’ interest.
Chapter 3 of Part 15 (ITA07/S874) requires the deduction of tax from ‘yearly interest’ arising in the UK. The interest is that chargeable either to income tax or to corporation tax. It requires the deduction of tax from yearly interest
- paid by a company, a local authority, a firm in which a company is a partner, or
- paid by any person to another person whose usual ‘place of abode’ is outside the UK.
Tax is to be deducted by the person by or through whom the payment is made, at the savings rate in force for the tax year in which the payment is made.
See SAIM9078 for more on the meaning of the term ‘person by or through whom the payment is made’.
In practice, the main circumstances where tax will be deducted are where a company makes a payment of interest to an individual or other non-corporate person, or where interest is paid by a person (individual, trustee or corporate) to another person whose usual place of abode is outside the UK. SAIM9080 explains the meaning of ‘place of abode’.
‘Yearly interest’ excludes interest covered by other rules in Part 15. These other rules include
- interest paid by deposit takers (see SAIM9020), building societies, the National Savings Bank, industrial and provident societies, authorised dealers in financial instruments, recognised clearing houses;
- interest paid from UK public revenues, quoted Eurobond interest, interest paid under the former MIRAS scheme;
- interest paid by a bank paid ‘in the ordinary course of its business’, broadly all interest paid by banks unless related to its capital structure or connected with tax avoidance (see CFM75100);
- interest paid to a bank or building society;
- ‘relevant foreign interest’, that is, interest which arises from a non-UK source (SAIM9090).
Companies, local authorities and ‘qualifying firms’ (a firm which includes a company or local authority as a partner) are also exempt from the requirement to deduct tax from interest paid to certain recipients - broadly other UK companies or non-resident companies carrying on trade in the UK through a permanent establishment (Chapter 11 of Part 15). See CTM35200 onwards (SAIM20000). Where a company does have to deduct tax from a payment of interest, it does so under the procedures set out in Chapter 15 of Part 15 (SAIM9150).
In addition a number of recipients are entitled to be paid gross. These are set out in ITA07/S936, and include local authorities, health authorities, charities, and pension schemes.
Partnerships are usually regarded as transparent for tax purposes unless otherwise indicated (ITTOIA05/S848). Deduction of tax is one of those exceptions and a partnership is not transparent for deduction of tax purposes.
Where a partnership lends money to a company and the company pays yearly interest falling within ITA07/S874 to the partnership, there is an exception from the duty to deduct income tax where ITA07/S937 applies. For ITA07/S937 to apply, each and every partner must fall within one of the exemptions falling within S937(3).
Where there is a ‘mixed’ partnership such that some partners fall within the exemptions but other partners do not, there remains a duty to deduct income tax from the whole of the interest payment from the company to the partnership; the interest payment is not carved up.
Statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 is not yearly interest (ITA07/S888).
Interest relating to compensation payments: amounts paid on or after 1 September / 1 October 2013
See SAIM9116 for the application of these exemptions where interest paid by building societies on or after 1 September 2013 or by banks on or after 1 October 2013 relates to compensation payments.