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HM Revenue and Customs Brief 22/08

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HM Revenue and Customs -Tax Authorities

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Issued on the 9 April 2008

Obligation of local authorities to deduct tax from interest

Background


This brief clarifies our position on the obligation of local authorities to deduct income tax at the basic rate, currently 20%, in two main circumstances:

  • Tax Deduction Scheme for Interest (“TDSI”) under Chapter 2 Part 15 Income Tax Act 2007 (“ITA 2007”); or
  • payments of yearly interest under Chapter 3 Part 15 ITA 2007.

Interest payments within TDSI

TDSI applies if a ‘deposit-taker’ makes a payment of interest on an ‘investment’ and, at the time the payment is made, that investment is a ‘relevant investment’.

A ‘deposit-taker’ includes a local authority, which includes a police authority.

An ‘investment’ includes a deposit with a deposit taker. A ‘deposit’ means, “a sum of money paid on terms which mean that it will be repaid (with or without interest)- (a) on demand, or (b) at a time or in circumstances agreed by or on behalf of the person who pays it and the person who receives it.” (Section 855(2) ITA 2007).

A ‘relevant investment’ is defined under section 856 ITA 2007. Not all investments are ‘relevant investments’. In order for an investment to be a ‘relevant investment’ there must be a deposit.

HMRC would not expect TDSI to apply in circumstances where there is no ‘deposit’ falling under Chapter 2 Part 15 ITA 2007.

Examples

  1. A police authority may confiscate money from arrested persons and hold onto that money while the case goes to court. Persons who are not charged or not found guilty will get their money back. Any interest payable on that money will not fall within TDSI.
  2. It is the duty of the local social services authority to provide after-care services for certain persons who are detained under section 117 of the Mental Health Act 1983. Prior to the House of Lords hearing in 2002 that held such after-care services must be provided free of charge, certain local authorities may have charged for such services. If local authorities subsequently refund the sums and pay interest on such refunds, TDSI will not apply to the interest paid.
  3. Where a local authority compulsorily acquires land, the owner is entitled to statutory compensation and statutory interest on such compensation from the date the acquiring authority became liable to pay the compensation. Again, there is no requirement under TDSI to deduct tax.
  4. Where a local authority loses in litigation and has cost orders made against it by a court, the costs are subsequently assessed and these are paid to the receiving party together with interest. TDSI does not apply to such interest payments.

Please contact Simon Turner for further advice on TDSI.


Deduction from certain payments of yearly interest

If TDSI does not apply (as in the four examples above), local authorities will need to consider whether the interest payable is ‘yearly interest’ falling under Chapter 3 Part 15 ITA 2007. If it is yearly interest, income tax should be deducted by the local authority at the basic rate in force for the tax year in which the payment is made.

Section 874(1) ITA 2007 applies, “if a payment of yearly interest arising in the United Kingdom is made - …(b) by a local authority…” However, section 874 does not apply to a payment of statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 (section 888 ITA 2007).

‘Yearly interest’ has no statutory definition. It has been contrasted with ‘short interest’. The classic example of short interest is interest payable on a bank loan for less than one year. However, it is not simply the case that interest payable for a period of more than one year always constitutes yearly interest whilst interest payable for less than one year does not.

The leading case on yearly interest is Cairns v MacDiarmid (56 TC 556) where the intention of parties is seen as the most important factor. If there is an intention that the debt should subsist for more than one year or it is mutually accepted that interest may have to be paid from year to year, the interest will be yearly. (Refer to HMRC Savings and Investment Manual (“SAIM”) 9075 – see under Manuals of the Practitioner Zone at www.hmrc.gov.uk).

However, where there is no loan, it is very difficult to determine the intention of the parties and whether interest payable is yearly interest at the outset, without the benefit of hindsight. Whether or not section 874 ITA 2007 applies depends on all the facts and circumstances under which the interest is paid.

We do not provide rulings on the issue of yearly interest, because failure to deduct tax from an amount of interest (yearly or otherwise) does not prevent it being taxable. Our view, therefore, is that whether or not tax is deducted at source is primarily a matter between the payer and payee. Where the payer of the interest is uncertain whether or not it is yearly interest, they may in practice decide to ‘play safe’ by deducting tax. (Refer to SAIM 9076 and SAIM 9180).

If local authorities deduct tax from payments of yearly interest, they should contact their local tax office without delay to make arrangements to pay the tax withheld. Their local tax office will then raise an assessment under section 963 ITA 2007. (Refer to SAIM 9170).

Please contact Adeline Chan, Lesley Hamilton or Tony Sadler for further advice on yearly interest.


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© Crown Copyright 2008.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2008-04-15 15:03:26 in Tax Articles

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