CTM35210 - Income Tax: deduction of tax: payments made before 1 April 2001

ICTA88/S7 (1), ICTA88/S349

This page outlines the rules governing deduction of IT from certain payments of interest and annual payments before changes made by FA01/S84 and FA02/S94. For payments made after 1 April 2001 see CTM35215.

When a UK resident company makes any payment within ICTA88/S349:

• The payment is treated as not paid out of profits or gains brought into charge to IT (ICTA88/S7 (1)).
• The provisions of the Taxes Acts relating to the deduction of IT from annual payments and so on, apply, except that the method for accounting is provided by ICTA88/SCH16 ( CTM35100 onwards).

Accordingly a UK company must deduct and account for IT in respect of payments to which ICTA88/S349 applies.

This is the case even if the recipient is a company not chargeable to IT in respect of the payment.

Interest on bank loans

The common exception to this is yearly interest on bank loans, which is generally payable without deduction of tax.

For interest payments made before 29 April 1996, two conditions had to be met for such interest to be paid gross:

• the interest had to be payable on advance from a bank carrying on a bona fide banking business in the UK, and
• the interest had to be payable in the UK.

It was the status of the lender at the date the advance was made (rather than the date the interest is paid) that mattered for the first condition.

You can check whether the lender was a bank carrying on a bona fide banking business in the UK at the date the loan was made, by checking whether there is any information on the lender for the period up to 29 April 1996 on the list of Banks on the Intranet (in the Library under the heading ‘Legal material - Bank’).

FA96/SCH37 changed the conditions to be met for gross payment with effect from 29 April 1996. From that date the two conditions which both have to be met were:

• the interest had to be payable on an advance from a bank, and
• at the time the interest is paid, the person beneficially entitled to the interest is within the charge to CT as respects the interest.

Again it is the status of the lender at the date the advance was made that is important for the first condition.

As well as amending ICTA88/S349 (3), FA96/SCH37 introduced, at ICTA88/S840A, a statutory definition of bank for many tax purposes. Please note that many concerns, which previously had not been recognised as banks for the purposes of Section 349 (3), became banks under this new definition from 29 April 1996. Interest on advances made by these new banks or after that date is payable gross, providing the second condition above is also met, but for advances made by such concerns before 29 April 1996 interest remains payable net of IT.

The statutory definition of bank in ICTA88/S840A was originally based on the institutions authorised to take deposits in the UK under the Banking Act 1987. The definition was replaced from 1 December 2001 (updated from 2 July 2002) by a new definition that used the concepts in the Financial Services and Markets Act 2000.

The second condition above regarding the person beneficially entitled to the interest being within the charge to CT as respects the interest applies to all interest payments made on or after 29 April 1996, including interest on advances made before that date. The condition has to be satisfied on every occasion a payment of interest is made. While the terms of the original loan agreement may satisfy this condition, if the loan is subsequently assigned by the bank to a non- UK company, the interest will thereafter fail this condition and IT should be deducted from future payments of interest. For advances made by recognised banks before 29 April 1996 that have been assigned to a non-UK company before that date, interest payable on or after that date will be payable net.