SAIM9070 - Deduction of tax: yearly interest
What is yearly interest?
At one time, the tax rules distinguished between
‘short’ interest and ‘yearly’ or annual
interest. The distinction is much less important now and is
relevant only to the obligation to deduct tax.
SAIM9075 explains what is meant by
‘short’ interest.
Chapter 3 of Part 15 (ITA07/S874) requires the deduction of
tax from ‘yearly interest’ arising in the UK. The
interest is that chargeable either to income tax or to corporation
tax. It requires the deduction of tax from yearly interest
- paid by a company, a local authority, a firm in which a company is a partner, or
- paid by any person to another person whose usual ‘place of abode’ is outside the UK.
Tax is to be deducted by the person by or through whom the
payment is made, at the savings rate in force for the tax year in
which the payment is made.
In practice, the main circumstances where tax will be
deducted are where a company makes a payment of interest to an
individual or other non-corporate person, or where interest is paid
by a person (individual, trustee or corporate) to another person
whose usual place of abode is outside the UK.
SAIM9080 explains the meaning of
‘place of abode’.
Exclusions
‘Yearly interest’ excludes interest covered by other rules in Part 15. These other rules include
- interest paid by deposit takers (see SAIM9020), building societies, the National Savings Bank, industrial and provident societies, authorised dealers in financial instruments, recognised clearing houses;
- interest paid from UK public revenues, quoted Eurobond interest, interest paid under the former MIRAS scheme;
- interest paid by a bank paid ‘in the ordinary course of its business’, broadly all interest paid by banks unless related to its capital structure or connected with tax avoidance (see BAM44025);
- interest paid to a bank or building society;
- ‘relevant foreign interest’, that is, interest which arises from a non-UK source ( SAIM9090).
Companies, local authorities and ‘qualifying firms’ (a firm which includes a company or local authority as a partner) are also exempt from the requirement to deduct tax from interest paid to certain recipients – broadly other UK companies or non-resident companies carrying on trade in the UK through a permanent establishment (Chapter 11 of Part 15). See CTM35200 onwards ( SAIM20000). Where a company does have to deduct tax from a payment of interest, it does so under the procedures set out in Chapter 15 of Part 15 ( SAIM9150).
Gross payments
In addition a number of recipients are entitled to be paid gross. These are set out in ITA07/S936, and include local authorities, health authorities, charities, and pension schemes.
Partnerships
Where a partnership lends money to a company and the company
pays yearly interest falling within ITA07/S874 to the partnership,
there is an exception from the duty to deduct income tax where
ITA07/S937 applies. For ITA07/S937 to apply, each and every partner
must fall within one of the exemptions falling within S937(3).
Where there is a ‘mixed’ partnership such that
some partners fall within the exemptions but other partners do not,
there remains a duty to deduct income tax from the whole of the
interest payment from the company to the partnership; the interest
payment is not carved up.
Statutory interest
Statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 is not yearly interest (ITA07/S888).
