Withholding tax on payments of interest

Produced by Tolley

The following Corporation Tax guidance note Produced 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
  • Payments made net
  • Payments made gross
  • Income tax suffered
  • Quarterly accounting
  • Payments and repayments
  • Interest on unpaid tax
  • Interest on overpaid tax

Withholding tax on payments of interest

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.

The Accounting for income tax video also explains the circumstances in which tax must be withheld on certain payments and the administrative aspects of the regime, together with worked examples.

Obligation to withhold income tax from certain payments

When UK companies, or partnerships of which a company is a member, make certain types of payment, they are required to deduct income tax (at the basic rate) 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 with a UK source when paid.

Yearly interest has no statutory definition but is accepted to be 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 is a discount.

What constitutes a UK source is determined by case law and depends on the facts of the particular case and how the transactions are carried out. HMRC consider the residence of the debtor is the most important factor, along with the location of the assets held by the debtor as these factors will determine where the debt is enforced.

Interest is deemed to have been paid when the recipient is free to draw upon the interest. HMRC considers that a book entry will constitute payment provided the paying company has sufficient funds to pay the interest.

Interest is

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