CTM35215 - Income Tax: deduction of tax: payments made on or after 1 April 2001

ITA07/Part15/Chapter 11

Where on or after 1 April 2001:

• a company, or a partnership if any member of the partnership is a company,

and, on or after 1 October 2002:

• a local authority, or
• a partnership if any member of the partnership is a local authority,

makes payments of the types listed below and reasonably believes that the recipient is within one of the categories in the obligation to deduct tax is switched off.

The payments concerned are payments that fall within section 930 (2):

• UK interest;
• certain annual payments;
• dividend or interest on securities issued by building societies; or
• proceeds of sale of UK patent rights;
• manufactured interest;
• exempt distributions

The categories in Chapter 11 are from 1 April 2001:

• a UK resident company Section 933,
• a partnership all of whose members are UK resident companies Section 937 (but see below for extension from 1 October 2002),
• a UK branch of an overseas company that will treat the income as part of the profits of the UK branch Section 934.

The categories were extended by FA02 and from 1 October 2002 include payments to:

• specified tax exempt bodies, such as a local authority, health service body or charity. For a full list see Section 936;
• a manager (or his nominee) of a PEP or ISA and the payment is in respect of the plan investments Section 935;
• a society or institution with whom TESSAs may be held and the payment is in respect of the TESSA investments – this exemption was repealed payments after 5 April 2005 for income tax and accounting periods ending after 5 April 2005 for corporation tax;
• a partnership, each member of which is an exempt body within Section 937;
• company resident in the UK or a non-resident company trading in the UK through a branch or agency in a partnership which is liable to CT (see Section 937 (5), ICTA88/S114 and ICTA88/S115);

or

• the European Investment Fund Section 937 (6).

The 'reasonable belief' test enables the payer to pay gross even when it is not in a position to know beyond doubt the status of the recipient. The payer can therefore act on the basis of assurances given by the recipient or by an intermediary if it considers these assurances to be sufficient grounds for reasonable belief.

Care should be taken not to breach duties of confidentiality if asked by the payer for confirmation that the recipient is within one of these categories. The position of the recipient may change and in the case of a UK branch of an overseas company it will be difficult to confirm that the sum will be taken into account when computing the branch profits. This may make it difficult or impossible for you to give any guidance to companies. In such circumstances they should be encouraged to seek any assurance they feel they need from the recipient directly.

Where it is ultimately found that the recipient was not entitled to receive the payment gross the Revenue retains the right to recover the IT which should have been deducted, see Section 938. In this event the normal provisions of ITA07/S874 onwards and ITA07/Chapter 15/Part 15will apply. See CTM35210.

In a case where the company does not believe that the conditions specified are satisfied but proceeds to make the payment gross or where the belief is clearly unreasonable then a penalty under TMA70/S98 may be appropriate.

FA02/S95 extended the exemptions in from the requirement to deduct tax to include persons authorised for the purposes of the Financial Services and Markets Act 2000 whose business consists wholly or mainly of dealing in financial instruments. Such a person need not deduct tax from any yearly interest paid in the ordinary course of his business under ITA07/S885.

FA05 introduced provisions on the taxation of alternative finance. One of these provisions was to include in Section 874 alternative finance payments. Consequently alternative finance payments should be treated in the same way as interest paid under Section 874 and they are also subject to the exemptions from Section 874 as described above and in CTM35210. The FA05 provisions apply to payments made under alternative finance arrangements entered into on or after 6 April 2005. However Section 874 applies to payments of profit share return under existing profit share arrangements if the payment is made on or after 6 April 2005. For further information on alternative finance payments see CFM6050 onwards and FA05/S46 - S56 and FA05/SCH2.