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HM Revenue and Customs Brief 47/08


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Issued 26 September 2008

Interest treated as a distribution deduction of tax at source

This Revenue & Customs Brief sets out our policy on deduction of tax at source from interest that is treated as a distribution under section 209(2) Income and Corporation Tax Act (ICTA) 1988. It will be relevant to companies that issue securities, and their professional advisers.

Section 209(2) ICTA 1988 sets out particular circumstances in which all or part of the interest paid by the issuer of a security is treated as a distribution for Corporation Tax purposes. The company cannot claim a tax deduction for interest that comes within the statutory provisions concerned. In the hands of a UK recipient, it is taxed as if it were a company dividend not as interest.

A company paying yearly interest may be required by section 874 Income Tax Act (ITA) 2007 to deduct income tax at source from the payment. Deduction of tax at source is not, however, required in respect of any interest that is treated as a distribution.

Some commentators have suggested that when section 349 ICTA 1988 the previous statutory provision dealing with deduction of tax at source was rewritten as section 874 ITA 2007, there was a change in the law. Section 349(2) previously referred to yearly interest 'which falls with Chapter 2 of Part 4 of Income Tax (Trading and Other Income) Act 2005 ... or which is chargeable to corporation tax under Case III of Schedule D ...'. Concern has been expressed that the absence of any corresponding words in section 874 means that the requirement to deduct tax at source has now been extended to all yearly interest even where it is treated as a distribution and therefore does not fall within the taxing provisions that deal with interest.

This is not our view. The question of whether the words in section 349(2) ICTA 1988 were necessary was discussed as part of consultation on drafts of what is now section 874. The conclusion reached, in conjunction with consultees, was that they were not.

The purpose of section 874, like its predecessor legislation, is to require income tax to be withheld from payments that have the character of interest in other words, which fall to be treated under the UK tax rules as interest. Once section 209(2) ICTA 1988 treats a payment as a distribution, it no longer has that required character: it is not 'yearly interest' to which section 874 applies. No withholding is therefore required.

Thus, in our view, the law operates as it has always done, and there is no requirement to deduct tax at source under section 874 ITA 2007 from interest that is treated as a distribution.


If you have any questions about this Revenue & Customs Brief, please contact:

Sue Davies
CT&VAT Financial Products Team
3rd floor, 100 Parliament Street

Email Sue Davies
Telephone 020 7147 2565

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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 2008-09-26 12:48:46 in Tax Articles

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