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Responses to consultation on changes to income tax rules for interest
Practical Law UK Legal Update 9-521-6566 (Approx. 7 pages)
Responses to consultation on changes to income tax rules for interest
by PLC Tax
| Published on 04 Oct 2012 • United Kingdom |
HMRC published a summary of responses to its consultation on changes to the income tax rules for interest on 2 October 2012. Among other decisions, HMRC will keep the quoted eurobond exemption for intra-group issues and the concept of "yearly interest".
Speedread
On 2 October 2012, HMRC published a summary of responses to its consultation Possible changes to income tax rules on interest (consultation document) (as to which, see Legal update, HMRC consults on changes to income tax rules for interest (detailed update)).
The government has abandoned the following proposals outlined in the consultation document:
- Abolishing the distinction between "yearly" interest and "short" interest.
- Repealing the "quoted Eurobond" exemption for Eurobond issues to group companies listed on a stock exchange on which there is limited trading in the Eurobond.
- Requiring tax on funding bonds (PIK notes) to be paid to HMRC in cash.
Although tax deducted on funding bonds will not have to be paid in cash, the issuer will be required to issue a certificate indicating its value on issue. The government will also introduce a disguised interest rule for income tax, modelled broadly on the corporation tax rules.
Background
On 5 March 2010, HMRC launched a consultation on proposed changes to the methods of accounting for income tax deducted at source from interest, patent royalties and other commercial payments (2010 document). For companies, the proposals included replacing the current form CT61 with an online form that can be downloaded when required. For non-corporates, it was also proposed that a specific form should be available online to replace the system of accounting for tax deducted at source through the self-assessment tax return or remitting it to HMRC with a covering letter. The possibility of removing the requirement to deduct income tax from commercial annual payments and replacing it with a requirement to notify HMRC was also considered. The March 2010 consultation closed on 28 May 2010. For more detail, see Legal update, Changes proposed to income tax deduction at source.
In the 2012 Budget (delivered on 21 March 2012), the government announce that it would consult on changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on deducting tax at source from such interest (see Legal update, 2012 Budget: key business tax announcements: Income tax rules on interest).
On 27 March 2012, HMRC published a consultation document entitled Possible changes to income tax rules on interest (consultation document) setting out proposals for:
- A new rule in Chapter 2 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) to determine the interest component of compensation payments (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Interest in compensation payments).
- New rules in Chapters 2 and 3 of Part 15 of the Income Tax Act 2007 (ITA 2007) providing for deduction of tax at source from the interest component of compensation payments (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Interest in compensation payments).
- Abolishing the concept of "yearly" interest and changing the meaning of "arising in the UK" in the rules on deduction of tax at source in Chapter 3 of Part 15 of ITA 2007 (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Repealing "yearly" interest and Changing meaning of "arising in the UK").
- Repealing the "quoted Eurobond" exemption from deduction of tax at source in section 882 of ITA 2007 for certain intra-group transactions (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Repealing quoted Eurobond exemption for intra-group issues).
- A new rule to put the tax treatment of "interest in kind" beyond doubt (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Treatment of interest in kind).
- Introducing "disguised interest" rules for income tax purposes (see Legal update, HMRC consults on changes to income tax rules for interest (detailed update): Disguised interest: income tax).
Responses to consultation
On 2 October 2012, HMRC published a summary of responses to the consultation document, setting out which of the consultation document proposals the government intends to pursue.
Interest in compensation payments
The government will make amendments to Chapter 3 of Part 15 of ITA 2007 to extend the requirement to deduct income tax from interest to compensation payments made to individuals. This will include such payments made by banks in the ordinary course of their business. However, HMRC will be given power to disapply, by regulation, the requirement to deduct in cases where it would be difficult to do so.
The government has decided not to extend:
- Section 380A of ITTOIA 2005 (which provides for payments "representing interest" made under the Financial Services Compensation Scheme to be treated as interest for tax purposes) so that it applies generally to payments representing interest (including compensation payments).
- Chapter 2 of Part 15 of ITA 2007 (the Tax Deduction Scheme for Interest (TDSI)) so that compensation payments can be designated as "relevant investments" and, therefore, subject to TDSI. Deposit-takers registered concerns about the need to modify existing administrative systems to accommodate such a change.
No repeal of "yearly interest"
The government will retain the concept of "yearly" interest. Although the responses recognised that this term is arcane, it is, nevertheless, one that is well understood. There were concerns that any change would affect a wide range of commercial practices (such as commercial paper issuance and group cash-pooling arrangements, which rely on the exemption for "short" interest) necessitating additional exemptions or amendments to existing exemptions, adding complexity to the tax system.
Changing meaning of "arising in the UK"
The government will clarify the meaning of "arising in the UK" for the purposes of Chapter 3 of Part 15 of ITA 2007 so that whether interest arises in the UK (that is, has a UK source) will be determined without reference to the location of any agreement or deed evidencing that debt.
No repeal of quoted Eurobond exemption for intra-group issues
The government has abandoned its proposal to restrict the quoted Eurobond exemption in section 882 of ITA 2007 so that it would not apply to intra-group Eurobond issues listed on a stock exchange on which there is limited trading in the Eurobond.
Treatment of interest in kind
Interest in kind
The government will amend Part 4 of ITTOIA 2005 so that interest paid in non-cash form (typically goods or vouchers) will be treated as equal to the retail or market value of the goods (or services). In the case of a voucher, the interest will be its face value or the cash equivalent of the goods or services for which the voucher can be exchanged.
A person paying interest in kind will be required to issue a certificate under section 975 of ITA 2007 (section 975 certificate), thereby making the "gross amount" clear for the purposes of deducting income tax.
Disguised interest: income tax
The government will introduce a disguised interest rule for income tax, modelled broadly on the corporation tax rules (as to which, see Practice note, Taxation of investments: shares as debt legislation). Accordingly, an income tax charge will arise on returns "economically equivalent to interest". Any income falling to be taxed under the disguised interest rule and under any other income tax rule (for example, the deep discounted securities (DDS) or accrued income scheme (AIS) rules) will be taxed under that other income tax rule.
The government will also repeal:
- Chapter 12 of Part 4 ITTOIA 2005 (disposals of futures and options involving guaranteed returns).
- Sections 597 to 606 of ITA 2007 and Chapters 5 and 6 of Part 7 ITA 2007 (income tax rules on repos and quasi-stock lending arrangements).
The disguised interest rule will make unnecessary the repo and quasi stock lending rules for income tax, which aim to tax interest-like returns in the same way as interest. An explanation for the repeal of the disposals of the futures and options involving guaranteed returns rules is not provided.
Next steps
The proposed changes outlined above will be introduced in the Finance Bill 2013. Draft legislation will be included in the draft clauses for Finance Bill 2013, which will be published on 11 December 2012 (see Legal update, Draft Finance Bill 2013 to be published on 11 December 2012).
Future consultation and review
A number of respondents suggested that the policy direction should be to extend, not restrict, circumstances in which gross payment is permitted. The government will, therefore, consider further the circumstances in which tax is withheld from interest in a cross-border context.
HMRC will amend its guidance, in the Savings and Investment Manual, clarifying its view of "short" loans that are repeatedly rolled over.
The government will publish a consultation document on the simplification of the DDS and AIS rules in light of the introduction of a disguised interest rule for income tax. No date has been fixed for its publication, but the intention is to follow a timetable allowing legislation to be introduced in the Finance Bill 2014.
Comment
The government's decision to abandon its plans to restrict the availability of the quoted Eurobond exemption, abolish the concept of "yearly" interest and require tax deducted on funding bonds to be paid in cash will be welcomed.
The government has clearly taken on board the objections made to the more controversial elements of these proposals, which would have resulted in additional complexity and uncertainty for business for no obvious revenue gain.
Source
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