Withholding tax on payments of interest

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Withholding tax on payments of interest
  • Obligation to withhold income tax from certain payments
  • Income tax suffered
  • Quarterly accounting
  • Payments and repayments
  • Interest on unpaid tax
  • Interest on overpaid tax

This guidance note explains the main scenarios where UK companies (other than financial institutions, etc) must withhold tax at source on payments of interest and how this is dealt with in practice.

Obligation to withhold income tax from certain payments

When UK companies make certain types of payment, they are required to deduct income tax at source and pay it over to HMRC. In doing so they act as a collector of the UK tax that may be due from the recipient of the related income. The recipient will usually be able to claim relief against its UK or overseas tax liability for the tax suffered at source, as long as they are not based in a tax haven.

Income tax is only deductible from payments of yearly interest, ie interest on loans capable of lasting more than 12 months. Short interest payable on loans in place for a period of less than 12 months is generally outside the scope of the rules.

As HMRC is only concerned to collect tax that may otherwise be difficult to chase, there are various exemptions and reliefs from the requirement to withhold. In particular, a UK company is not required to withhold tax from payments of interest to another UK company. In addition a company may withhold at a reduced rate where the recipient qualifies for relief under the terms of a Double Tax Treaty or where the provisions of the EU Interest and Royalty Directive apply. See the Withholding tax guidance note for further details.

The main instances where companies may therefore have to deduct income tax at source from interest are:

  • payments of yearly interest to individuals
  • payments of yearly interest to overseas companies
  • payments of yearly interest to partnerships

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