BIM45775 - Specific deductions: interest: annual interest payable abroad

Annual interest chargeable to tax under Case III of Schedule D which is paid to a non-resident will generally be paid under deduction of tax (ICTA88/S349 (2), see AP92). For payments of interest made by a company or local authority after the 1/4/2001 the obligation to deduct tax may be switched off, see CTM35200 onwards for further information.

Annual interest on certain loans contracted abroad may be outside the scope of Case III and be paid in full.

ICTA88/S82 (1) gives rules for both possibilities. In both cases the liability to pay the interest must have been incurred wholly and exclusively for the purposes of the trade.

1. Where tax is deducted and accounted for under ICTA88/S349 (2) or would be deducted but for a double taxation agreement (see DT1821), the interest should be allowed as a deduction in the accounts.
   
2. Where the interest is paid in full, it should be allowed if it satisfies the conditions set out in BIM45776 you should disallow an appropriate amount of interest where it is:

and

It is unlikely that you will need to make an adjustment if the borrower and the lender are at arm's length.

Annual interest which is allowed as a trading expense and is paid under deduction of tax because the recipient lives abroad cannot be carried forward as a trading loss, see also BIM75500.

For more information on interest as an allowable trading loss see BIM45770.