UK and International Tax news

Responses To Condoc On Possible Changes To Income Tax Rules On Interest

Friday 19th October 2012

In March 2012 HMRC 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.  Comments were invited 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 ITA 2007 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 addition to receiving written responses, HMRC held a number of meetings to discuss the proposals with businesses, representative bodies and professional firms. In summary, the views expressed by those who replied on each of the topics included in the consultation were broadly as follows:

Changes to the rules on deduction of tax from interest included in compensation payments to provide greater clarity for taxpayers were generally welcomed, but concern was expressed that changes would increase administrative burdens on business.

Most respondents wanted to see references to ‘yearly’ interest retained in ITA 2007.

Opinions were mixed on the merits of changes to the term ‘arising in the UK’.

Most respondents were against changes to the quoted Eurobond exemption.

Proposals for specific rules on the deduction of income tax from interest-in-kind were generally welcomed but concern expressed at the complexity of the proposed approach.

Most respondents were against the proposal that income tax due on funding bonds should be paid in cash.

Most respondents were in favour of, or had no objection to, the introduction of legislation on disguised interest, but wanted to see this done in the context of the simplification of other tax rules.

Many responses made the comment in relation to all the proposals in the consultation, that any changes would need to be accompanied by improvements to HMRC’s guidance, and that due provision for commencement, transitional rules and ‘grandfathering’ provisions would be needed to minimise the impact on existing arrangements.

The Government will propose legislation to be introduced in Finance Bill 2013 on the deduction of tax from interest included in compensation payments, specialty debt, interest in kind, the valuation of funding bonds and disguised interest.

 The proposals in the consultation document on ‘yearly’ interest, the quoted Eurobond exemption and cash payment of tax on funding bonds will not be taken forward.

 If you would like further details on the above, please contact Keith Rushen on 0044 (0)20 7486 2378.

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