Interest received by mutual coys

Interest received by mutual coys

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Before 0% CT rate we used to complete CT returns for mutual companies and non-profitmaking clubs and associations on which (typically) the only chargeable income was Case III interest on bank accounts (now non-trading loan relationships?).

When the 0% CT rate band was introduced we sought from local tax offices wholesale exemption from the annual requirement to complete CT returns, subject to periodic review, based on the fact that bank interest would easily fall within the 0% rate band. Full disclosure was made, and local tax offices unanimously agreed to grant "dormant" status.

Now that the 0% CT rate band is to go, one way or another we will have to revert to paying tax on the interest (note to self - deadlines for notification of liability).

We now understand that the driving force behind the recent introduction of the £500 exemption from Additional Rate tax assessable on trusts is that such interest as described above is technically trust income and should be (and should always have been) chargeable to income tax, not corporation tax, as discretionary trust income. The intention behind the £500 exemption was (I undestand) to avoid the need for thousands of trust tax returns most of which would fall within that limit.

The exemption appears to be wholly ineffective because such interest as falls within the £500 limit remains chargeable at the savings rate. Banks apparently lack the authority to pay interest to corporate bodies under deduction of savings rate tax at source, so to comply with the strict letter of the law we shall still have to set up all of those trust references. In fact it is even worse than pre 0% rate band, because the trust returns will not be prepared (necessarily) to the same period as the accounting year end.

One solution might be to put all such funds onto non-interest-bearing current accounts, on the grounds that the admin cost of tax compliance would exceed the interest earned (net of tax).

I would be interested to know how other practicioners are approaching this issue, or indeed whether my summary of the legalities as above is flawed.

I would also be interested to know whether banks are indeed proscribed from deducting SR tax at source from interest paid to corporate bodies, GIVEN THAT the tax status of that interest is as trust income not corporate income. Indeed, perhaps they have no discretion but to deduct tax at source in light of this?
Clint Westwood

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