United Kingdom Tax Alert - 2 October 2012
Tax authorities issue response document for withholding on interest payments
By Simon Cooper, Bill Dodwell, Philip Richards and Andy Wilde
Earlier this year, the U.K. tax authorities (HM Revenue & Customs (HMRC)) issued a consultation document that included proposals for a number of changes to the taxation of interest. Among other items, the document considered the removal of both the quoted eurobond exemption from withholding in certain circumstances and the exemption for “short interest.” A follow up document summarizing the responses received from business and HMRC’s intended next steps in respect of the various matters under consultation was issued on 2 October 2012.
HMRC received a significant number of representations, which were broadly under four headings:
- Concerns about potential disruptions to the financial markets;
- Potential administrative burden for both taxpayers and HMRC;
- Limited tax revenue at stake; and
- Negative impact on U.K. competitiveness – which would be counterintuitive given all the recent actions taken to attract business to the U.K.
As a result of the strong response from business on certain areas of the consultation, HMRC has now announced the decision not to take forward a number of the original proposals. This includes dropping the proposal to restrict the exemption from the requirement to withhold tax on certain “intra-group” quoted eurobonds. The consultation document also notes that consideration will be given to the wider question of the extent to which tax is withheld from interest in a cross-border context. This is in response to a number of comments being made that, if the U.K. is to maintain its attractiveness, it should look to extend, rather than restrict, the circumstances in which interest can be paid without withholding tax.
Another area of consultation that HMRC will not be taking forward is the proposed removal of the requirement that interest is “yearly” for withholding to apply. The responses highlighted the wide range of commercial practices that could have been affected, including intra-group cash pooling arrangements and short-term bridging finance.
Parts of the consultations that are being taken forward include:
- Deduction of tax from interest included in compensation payments;
- Specialty debt – this is debt created by deed or instrument under seal. The law will make it clear that the meaning of “arising in the U.K.” will be determined without reference to the location of any agreement or deed evidencing the debt;
- “Interest in kind” legislation will be introduced to determine the value of interest paid in goods or services and, additionally, there will be a requirement for a person paying interest in kind or by funding bonds to issue certificates regardless of whether the recipient requests it ; and
- The introduction of generic rules for individuals to tax interest-like returns.
The proposed legislation will be included in the draft clauses for Finance Bill 2013 which will be published later in 2012.