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HMRC internal manual

Savings and Investment Manual

Deduction of tax: yearly interest: case law on short and yearly interest

When is interest ‘short’ or ‘yearly’?

Although tax law has made a distinction between yearly and short interest since 1806, there is no statutory definition of yearly interest. The distinction rests wholly on case law.

The classic example of short interest is interest payable on a bank loan for less than a year. In the early case of Goslings and Sharpe v Blake (2TC450), the Court of Appeal confirmed that interest on such a loan, where there was no provision to extend the borrowing for more than a year, could not be yearly interest, notwithstanding the use of an annual percentage rate.

It is therefore a useful starting point to say that where a loan or debt is for less than a year, there is a presumption that it gives rise to short interest. Conversely, interest on a loan or debt that exists for a year or more is likely to be yearly interest.

But you cannot just apply this as a mechanical rule, with the benefit of hindsight. Particular difficulties may occur where, at the time when a loan or debt comes into existence, it is not clear how long it is going to last.

For example, the case of Bebb v Bunny (1854) 1 K&J 216 concerned the payment into court of the purchase price of a property, with interest on the delayed payment. It would have been possible for the interest to have run for more than a year if the purchaser had been particularly late in paying. The judge held that the interest was yearly. On the other hand, the Court of Appeal held, in Gateshead Corporation v Lumsden (1914) 2 KB 883, that certain interest which had run for more than a year was nevertheless short interest. The interest in question was statutory interest due to Gateshead Corporation on late-paid contributions towards the cost of making up roads. The court took the view that the mere failure by the Corporation to enforce the debt within a year did not make the interest ‘yearly interest’.

To distinguish interest arising on long-term loans from that arising on apparently short-term debts, the courts began to lay stress on the debt having ‘a measure of permanence’ or being ‘in the nature of an investment’ as opposed to being merely ‘temporary accommodation’. Thus in Corinthian Securities Ltd v Cato (46TC93) the Court of Appeal decided that interest on a bank loan, repayable on demand, was yearly interest because the loan had the quality of investment - even though, in the event, the loan was called in after 6 months.

However, the leading case on yearly interest is now considered to be Cairns v MacDiarmid (56TC556). In this case, the Court of Appeal saw the intention of the parties as the determining factor. If the debtor and creditor intend that the debt should subsist for a year or more, or where there is mutual acceptance that the interest may have to be paid from year to year, the interest will be yearly. This principle was applied in Minsham Properties Ltd v Price (63TC570), where a loan from a parent company, repayable on demand, gave rise to yearly interest because it was regarded by both parties as permanent finance.

It was felt in Cairns v MacDiarmid that merely asking whether a loan had the character of an investment was a less useful test - even an overnight deposit of money might be regarded as an ‘investment’.