UK and International Tax news

Possible Changes To Income Tax Rules On Interest

Thursday 19th April 2012

HMRC has recently issued a consultative document on proposals for possible changes to the income tax rules on the taxation of interest and interest-like returns, and rules on the deduction of tax at source from such amounts.

The Government is considering a number of legislative changes to these rules to address current problems in their application and have invited comments on the following proposals.

(a)    A new rule in Chapter 2 of Part 4 of ITTOIA05 to determine the interest component in  compensation payments.

(b)   New rules in Chapters 2 and 3 of Part 15 of ITA07 to provide for deduction of tax at source from the interest component in compensation payments.

(c)    In relation to the rules on deduction of income tax, the abolition of the concept of ‘yearly interest’, and a change to the meaning of the term ‘yearly interest arising in the UK’.

(d)    A change to the exemption from the requirement to deduct tax from quoted Eurobonds for certain intra-group transactions.

(e)    A new rule to put the tax treatment of ‘interest in kind’ beyond doubt.

(f)     A new ‘disguised interest’ rule to address income tax avoidance in relation to interest.

In 2010 HMRC consulted on changes to the procedures for the collection of income tax deducted at source by companies, local authorities and individuals. The proposals in that consultation do not affect the proposals in the latest document which will not apply to the taxation or deductibility of interest paid and received in the course of a trade or property business, the operation of most aspects of the Tax Deduction Scheme for Interest (TDSI) in Chapter 2 of Part 15 of ITA07 under which income tax is deducted at source from interest paid by deposit-takers and building societies, or any other arrangements under which tax is deducted at source.

Comments have been requested by 22 June 2012 and if legislation is proposed, this will be included in Finance Bill 2013.

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