TDSI Bulletin 32 - 3 June 2009

This bulletin tells you about:

  • Guidance Notes - amendments to chapter 7
  • Appendix A - Chapter 7 of the TDSI Guidance Notes

Please ensure the appropriate people in your organisation read this bulletin

Enquiries about this bulletin should be addressed to the person named in the issuing e-mail.

The Tax Deduction Scheme for Interest (TDSI) pages are available on the HM Revenue & Customs (HMRC) website.

Guidance Notes - amendments to chapter 7

Chapter 7 of the Tax Deduction Scheme for Interest Guidance Notes have been amended. The revised text is shown at Appendix A. The HM Revenue and Customs website will be updated shortly.

Appendix A - Chapter 7 of the TDSI Guidance Notes

Incorrect treatment of payments of interest

7.1 Financial Institutions may become aware that they have treated payments of interest incorrectly. Examples of common mistakes are

  • interest paid net when it should have been paid gross,
  • too much interest paid,
  • too little interest paid, and
  • interest paid gross when it should have been paid net.

What can Financial Institutions do to adjust interest payments and tax deducted?

7.2 Where Financial Institutions discover that they have dealt with interest incorrectly they should follow the guidance in paragraphs 7.3 to 7.8 below. Financial Institutions do not have to put things right if their treatment of interest was correct on the basis of the information available to them at the time the interest was paid. If BRT was deducted Financial Institutions should simply issue a Section 975 statement to the investor. Financial Institutions can correct matters for the current tax year if a Section 975 statement has not been issued for the interest payment(s) in question. If the repayment is for an earlier year, or if it is for the current tax year but a Section 975 statement has been issued the investor must reclaim any overpaid tax from their tax office as the investor should have completed their SA return, repayment claim or CT return using the actual details of interest received (and tax deducted).

If a form R85 is received near the end of one tax year, but delays prevent the form being processed until the next tax year, it can still be treated as being effective in the previous tax year for retrospection purposes (if the Financial Institution offers retrospection). So tax deducted in the year in which the form was received can be refunded as long as a S975 certificate has not been issued. See paragraph 3.21.

Adjustments where interest has been wrongly calculated

7.3 Where a Financial Institution calculates interest to be paid or credited before the actual interest payment date, there may be transactions between the time of calculation and the date interest is paid. As a result the next interest payment may be incorrect. Financial Institutions usually correct this by adjusting the next interest payment and this can continue irrespective of whether a S975 certificate has been issued or the corrections adjusts a previous year. Where interest has been overpaid and the account has been closed see paragraph 7.7.

Adjustments and the CT61 Return

7.4 Where the Financial Institution corrects the BRT position on incorrect payments of interest they must adjust the next form CT61 return sent to HMRC Accounts Office. Any underpaid tax should be added to the tax payable for that CT61 return period or any overpaid tax should be deducted from the tax payable for that CT61 period, as appropriate. Adjustments should be made using the rate in force at the time of the original interest payment.

Where a Financial Institution makes an adjustment to include unpaid BRT, recovery from the investor is a matter between the Financial Institution and the investor.

Retention of evidence

7.5 In all cases, Financial Institutions must retain details of the adjustments made and make them available to HMRC if requested. Details should include

  • the name and address of the investor,
  • NINO (where provided),
  • the account number and branch identifier (if necessary),
  • the amount of the adjustment, and
  • the tax year(s) to which it relates.

Adjustments and Section 975 Statements

7.6 Where a Section 975 statement has already been issued showing details of interest payment(s) and either the interest paid or the BRT deducted, is for whatever reason, adjusted, Financial Institutions must not issue further Section 975 statements, showing the adjusted interest payment(s) or BRT. Financial Institutions should instead issue a letter of explanation to the investor showing the adjusted details. Where an additional payment of interest is made because too little interest has previously been paid, a Section 975 statement may be issued showing that payment as a separate payment of interest in the tax year in which it is paid.

Closed accounts

7.7 If an error is found in the same year the account is closed it may be possible to correct the position for the customer. But if an error is found in a later tax year, the Financial Institution cannot correct the position. Instead, the customer should contact their tax office.

Where too little interest has been paid on closure of an account, an additional payment may be made to correct the position when the error comes to light. The Financial Institution should deduct BRT if appropriate, and may issue a Section 975 statement showing the additional payment. BRT should be deducted at the rate in force for the year in which the additional payment is made.

Where too much interest has been paid on closure of an account, recovery of the overpaid amount is a matter between the Financial Institution and the investor. Where BRT has been deducted from an overpayment of interest, and the BRT has been accounted for to HMRC, the Financial Institution should recover the excess by adjusting their next CT61 return.

Penalties on term and notice accounts

7.8 Where an investor makes a withdrawal from his or her account before the end of its fixed term, or without giving the required period of notice, some Financial Institutions impose a penalty. Normally, the penalty is deducted from, or reflected in, the next payment of interest on the account. Provided the penalty is not separately charged to the account but is deducted from the interest payment, Financial Institutions should deduct BRT only from the interest actually paid. But where the penalty is charged to the account and the full amount of the subsequent interest payment is paid separately BRT must be deducted from the full amount of interest paid.

Where an account is closed and a penalty is deducted from the final interest Financial Institutions should deduct BRT only from the interest actually paid.

Interest already paid, and BRT already accounted for, remain unaffected by any penalty charged by the Financial Institution, unless the terms of the account require a recalculation of interest already paid.