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Changes on income tax interest due in FB 2013

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15th Oct 2012
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A government proposal to deduct income tax at source from interest on compensation payments to individuals should be introduced gradually in order to reduce disruption to businesses.

This was one of the responses to a government consultation earlier this year on possible changes to the income tax rules on interest. Another recommendation was for clearer guidance on the taxation of interest payments when the changes are made in the 2013 Finance Bill.

The proposals will not affect the deductibility of interest paid and received in the course of a trade or property business. The ICAEW said that “generous” interest provisions in the UK tax code make the tax system competitive and encourage investment in the UK.  

The proposed changes include:

Interest included in compensation payments

The rules in Chapter 3 of Part 15 of Income Tax Act 2007 will be amended in Finance Bill 2013 so that it will be clear that income tax is deductible from interest included in compensation payments to individuals which are made by bodies outside the tax deduction scheme for interest, including payments made by banks in the ordinary course of their business.

Yearly interest arising in the UK

The government does not now intend to abolish the concept of yearly interest and hence of short interest from which income tax is not normally deducted.

Draft clauses will be introduced in Finance Bill 2013 to clarify the treatment of “specialty debt” to make it clear that the meaning of “arising in the UK” will be determined without reference to the location of any agreement or deed evidencing such a debt.

Quoted Eurobonds

The government was considering changing the rules on interest payments on quoted Eurobonds which represent inter-company debt within groups of companies. The government is not going to introduce any changes to the current arrangements but it will look at the wider question of the extent to which tax is withheld from interest in a cross-border context.

In a podcast for AccountingWEB Anne Fairpo, a barrister specialising in tax at Atlas Chambers, said confirmation that just having a document under UK law or signed in the UK will not necessarily mean that interest arises in the UK, would be useful for overseas businesses that see the UK as a good place to do business.

However, Fairpo said that the plan to clarify that tax should be deducted from compensation payments to individuals should include bank payments may create compliance headaches for banks. Bank may lobby against the proposal, she said.

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