Whether interest is short rather than annual is a question to be
considered by the parties to each transaction at the time it is
entered into by reference to the relevant facts and documentation.
Our general view follows the guidance laid down in the case of
Cairns v MacDiarmid (56TC556). In particular we place reliance upon
the view expressed that the nature of the interest depends upon the
intention of the parties to the transaction. Sir John Donaldson MR
highlighted this factor at page 581 where he said:
`[it] is well settled that the difference
between what is annual and what is short interest depends upon the
intention of the parties. Thus interest payable on a mortgage
providing for repayment of the money after six months, or indeed a
shorter period, will still be annual interest if calculated at a
yearly rate and if the intention of the parties is that it may have
to be paid from year to year'.
On the basis of our current knowledge of the repo market we
accept that the vast majority of repo arrangements entered into
will produce repo `interest' which is short in nature. Our
understanding is that repo arrangements are not entered into as a
substitute for long term finance. Only the parties to any
particular transaction will know the true nature and substance of a
repo transaction. There will generally therefore be no reason to
challenge cases where the parties to a repo agreement agree that
the `interest' is short in nature. We will however take a different
view if it is clear that the transaction has been entered into as a
substitute for long term finance and in particular where it is
clear that finance has been arranged in this way specifically to
side-step the deduction of tax at source which would otherwise have
been appropriate.
With effect from April 2001, payments of interest between UK
companies are to be paid without deduction of tax. In these
circumstances the distinction between annual and short interest
loses its significance.
