This is a re-issued version of Revenue & Customs Brief 47/08.
This Brief sets out our policy on deduction of tax at source from interest that is treated as a distribution under TA 1988 s 209(2)(Opens new window). It will be relevant to companies that issue securities, and their professional advisers.
TA 1988 s 209(2)(Opens new window) 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 ITA 2007 s 874(Opens new window) 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 TA 1988 s 349 (Opens new window) – the previous statutory provision dealing with deduction of tax at source – was rewritten as ITA 2007 s 874 (Opens new window), there was a change in the law. Section 349(2) previously referred to yearly interest “which falls within ITTOIA 2005, Pt 4, Ch 2 (Opens new window) ... 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 s 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 TA 1988 s 349(2) (Opens new window) were necessary was discussed as part of consultation on drafts of what is now s 874. The conclusion reached, in conjunction with consultees, was that they were not.
The purpose of s 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 TA 1988 s 209(2) (Opens new window) treats a payment as a distribution, it no longer has that required character—it is not "yearly interest" to which s 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 ITA 2007 s 874 (Opens new window) 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
London
SW1A 2BQ.
Tel: 020 7147 2565.
Issued 12 January 2010
