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
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:
CT&VAT Financial Products Team
3rd floor, 100 Parliament Street
Email Sue Davies
Telephone 020 7147 2565
About the Author
© 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
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Article Published/Sorted/Amended on Scopulus 2008-09-26 12:48:46 in Tax Articles