INTM505130 - Payment of interest overseas: deducting income tax

Accounting for tax deducted

Where tax is deductible under ICTA88/S349(2)(c), the charging provisions of ICTA/S350(1) and (3) apply. ICTA/S350(1) provides that

'Where any payment within ICTA/S349 is made by or through any person, that person must forthwith deliver to the inspector an account of the payment and shall be assessable and chargeable with income tax … on the payment…'

A resident company payer must comply with the provisions for accounting for income tax which are set out in ICTA88/SCH16.

If interest is paid gross, without treaty clearance, then an assessment may be made on the company that failed to withhold tax, under ICTA88/SCH16, to recover the lost tax. Such an assessment may give rise to interest payable under TMA70/S87.

If interest is paid gross which should have been paid under deduction of tax and included in an ICTA88/SCH16 return, then the payer will have failed to make a return (or will have made an incorrect return). TMA70/S98 allows the General or Special Commissioners to impose a penalty of up to £3000 for this together with a further penalty of up to £600 a day for each day when the offence continues after the award of an initial penalty. These penalties may be imposed even where there is no net tax due, for example, because treaty clearance for gross payment is subsequently given.

This is the legal position. However HM Revenue & Customs recognises that delays may occur in the chain of events involving certification of residence by an overseas tax authority, application for clearance and enquiry into the particular circumstances of a loan. It does not want to inconvenience taxpayers more than necessary. Consequently, it has adopted a practice for dealing with the whole process under its care and management powers. That practice is outlined at INTM506030.

If and when authorisation is given to pay interest on a cross-border loan gross in accordance with a treaty clearance, the rules under which a United Kingdom company accounts for income tax on cross-border interest payments are modified as follows

• payments authorised to be paid without deduction of tax are not within ICTA88/SCH16 and need not be shown on form CT61(Z)
• payments authorised to be paid under deduction of tax at a reduced rate are to be entered into the appropriate section of Part A of form CT61(Z) and the reference number of the authorisation quoted.

It has been accepted that if, in practice, the UK permanent establishment of an overseas bank uses a Schedule 16 return to account for the income tax deducted from interest paid, no assessment need be made under ICTA88/S350.

See INTM505020 for further information on the obligation to deduct tax under ICTA88/S349(2)(c).