Withholding tax on interest payment

Under the existing rules, which apply generally to interest other than that paid by banks or building societies on deposits:

  • Where the borrower is a company who pays interest due to an individual, the borrower is required to deduct income tax at source from the interest for payment to HMRC, and pay the interest to the lender net of tax.
  • Where the borrower is a company who pays interest due to another UK company, the borrower is not required to deduct tax at source, and interest may be paid gross.
  • Where the borrower is an individual (including a sole trader) who pays interest to either an individual or a company resident in the UK, the borrower is not required to tax deduct at source and interest may be paid gross. ·
  • However where the interest is due to a lender who is resident outside the UK, the borrower is required to deduct income tax at source from the interest for payment to HMRC, and to pay the interest to the lender net of tax, regardless of the identity of the borrower.

Primary legislation:

  • Income Tax Act 2007 section 874.
  • Rate of deduction – Basic rate : presently 20%
  • DTAA: Where DTAA exemption exists. HMRC prior permission required to pay gross.
  • Main guidance: HMRC Manual: CTM35000 Contains detailed provisions for deducting tax and depositing it with HMRC
  • Form to be submitted: CT61

 

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