Corporation Tax

Accounting for income tax

Produced by Tolley
  • 19 Oct 2021 23:00

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

  • Accounting for income tax
  • Obligation to withhold income tax from certain payments
  • Income tax suffered
  • Quarterly accounting
  • Payments and repayments
  • Interest on late paid tax
  • Interest on overpaid tax

Accounting for income tax

Obligation to withhold income tax from certain payments

When companies make certain payments to specified types of recipient, they are required to deduct income tax at source and pay it to HMRC. In doing so, they act as a collector of tax. The liability to the tax is borne by the recipient of the related income who should usually be able to claim relief for the tax suffered at source.

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

  1. payments of interest which are not to companies

  2. payments of interest overseas

  3. payments of interest to partnerships (unless all the partners / members are companies), and

  4. royalty payments

ITA 2007, ss 874, 946

Tax is deducted at the rate of 20% in respect of interest and royalties.

A common example of the payment of interest by a company to an individual, is where a director has made a loan to a company. A commercial rate of interest may be paid by the company on the director’s loan account, as one way of extracting funds for the director. The interest is an allowable deduction for the company, provided the loan money is used within the company’s business, and not for an ‘unallowable purpose’.

Income tax suffered

Companies do not suffer income tax on amounts received from other UK companies and, likewise, they do not withhold tax on payments to other UK companies.

However, if companies receive patent royalties from individuals they are deemed to have received the income net of 20% income tax.

A company may be a partner in a partnership with non-corporate members. As such, income tax may be withheld on its share of, for example, interest income received as a member of a partnership.

Interest and royalty payments by a UK company to an EU associate can be made gross. In the case of interest payments, an exemption certificate is required. The rules cover payments to EU

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