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Is there a requirement to deduct tax on the interest payments made to clients?

Where a firm of solicitors holds monies on behalf of clients, is there a requirement to deduct tax on the interest payments made to the clients? Does this position change if the client is non-UK resident?

My understanding is that where interest is credited to the account without tax deducted, the interest is paid to the client gross. Similarly, if tax is deducted the interest is paid to the client net.

Does the firm have to deduct tax on payments to non residents if they have not submitted a form R105?

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12th Apr 2012 20:37

My experience is that solicitors do not have:

1) the mechanism to deduct income tax at (their) source and pay it over to HMRC;

2) either the interest or the will (no pun intended) to do so; 

Your second paragraph is what I experienced in practice and derives not from any ruling that I was aware but partly due to 1) and 2) and primarily because client monies are just that; monies and interest earned were essentially just "passed on" to clients and they were left to deal with their own tax affairs. 

No client ever queried whether the interest they had received was net or gross.  I believe either it did not occur to them to ask, they assumed it was net, or they did not ask because they may have received the answer they didn't want.  However, as far as I recall, interest earned on both the general client and  designated deposit accounts was credited net.

I hope this is of help.

tladirect

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By zameer
18th Jul 2012 17:38

Undesignated deposit accounts. Deduction of tax does not apply to interest on an undesignated (general) client account.

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