When UK companies make certain types of payment, they are required to deduct income tax at source and pay it over to HMRC. Companies must account for this income tax on a quarterly basis, using a CT61 return, based on amounts paid and received in the particular quarter.
The quarter ends are based on the normal calendar year, ie 31 March, 30 June, 30 September and 31 December. However, if a company’s year end is different from any of these, the balance sheet date is deemed to be a quarter-end, so there will be five return periods.
The main instances where companies may have to deduct income tax at source are payments of yearly interest to individuals, overseas companies or partnerships and some royalty payments. Yearly interest is on a loan capable of lasting more than 12 months.
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.
Tax is deducted from payments of interest at the basic rate of income tax in force at the time the payment is made, unless reduced under a Double Tax Agreement. The basic rate is currently 20%.