CFM17380 - MODs: tax deduction regulations

Regulations for deduction of tax from MODs

The regulations modifying the basic approach of ITA07/S581 and S582 and ITA07/S922 – S925 are in SI1993 No 2004. Regulation 2B excludes MODs on overseas debt securities constituting loan relationships from the tax deduction regime. Such payments are not treated as annual payments unless paid by a non-trader (or by a trader who is not a company if paid otherwise than in the course of that trade). In the few cases where they are treated as annual payments, no deduction of tax is required.

Regulation 4 aims to put tax deduction requirements mostly onto financial traders or intermediaries known as Authorised UK Intermediaries (AUKIs) or Authorised UK Collecting Agents (AUKCAs). It does this by disapplying paragraph ITA07/S922 when a MOD is paid by a non-AUKI to an AUKI or AUKCA and imposing a charge on the recipient analogous to the charge imposed by ITA07/S923 when a UK person receives a MOD from abroad. The ITA07/S923 and regulation 4(3) charges are both known as ‘reverse charges’. The disapplication of ITA/S922 paragraph 4(2) does not apply where the non-AUKI/AUKCA payer receives the real dividend, that is, it applies only if the payer receives either a MOD or no dividend.

The regulation 4(3) reverse charge is disapplied where an AUKI/AUKCA that has received a gross MOD from a non-AUKI pays an equivalent MOD gross by virtue of regulation 5 CFM17385.