CFM17034 – Funding bonds: deduction of tax

Deduction of tax at source

Where funding bonds are issued by or through a person in the United Kingdom, any obligation to deduct tax at source from interest (for example under ITA07/S874) applies with modifications. ICTA88/S582 tells the issuer how to account for the tax. There are two steps.

First, the issuer must “retain” (i.e. withhold) the appropriate proportion of the bonds from the creditor, to represent the income tax deductible. This step is mandatory (unless, exceptionally, retention would be “impracticable”, see CFM17036).

Second, the issuer “may“ satisfy the tax by tendering the withheld bonds to HMRC. The word “may” means that tendering them is not mandatory, and so the issuer can pay the tax in cash instead. If paid in cash it is still mandatory to withhold bonds from the creditor under step 1.