United Kingdom Tax Alert - 28 March 2012
Consultation launched on income tax rules on interest
By Bill Dodwell and Phil Richards
On 27 March 2012, the U.K. tax authorities (HM Revenue and Customs or HMRC) commenced a consultation on possible changes to the U.K. income tax rules on interest. The two consultation areas most relevant to multinational businesses are the following:
- Amending the quoted Eurobond exemption from U.K. withholding tax on interest so that it would not apply where a Eurobond is held by a fellow group company. This measure is not intended to impact funding raised from third parties.
- Withdrawing the exemption from withholding tax in respect of “short” interest (broadly interest on short-term loans). Amongst other things, there may be some impact on certain cash pooling arrangements if this change is enacted. The U.K. has a broad tax treaty network and typically agrees to a zero rate of withholding tax on interest, provided this is reciprocated. Additional treaty clearances could be needed and there is a helpful registration procedure that could apply.
Consultations also will be held on:
- Requiring that the withholding tax due on funding bonds (PIK Notes) be paid to HMRC in cash, rather than HMRC being required to accept the funding bond as payment for the tax deducted;
- Clarifying the tax treatment of interest included in compensation payments;
- Introducing changes to the rules for determining whether interest has a “U.K. source;”
- Addressing some of the practical issues associated with paying interest in kind; and
- Extending the income tax anti-avoidance rules to counter schemes where an interest-like return is taxed as something other than interest. Note that there is already a body of law that deals with such situations from a corporation tax perspective.
The deadline for submitting responses to the consultation is 22 June 2012 (and Deloitte will be responding). If draft legislation follows, it is likely that it will be published in Autumn 2012 to take effect in 2013.