BKM102000 - Statement of Practice 4/96

Under ITA07/S874 companies have a duty to deduct sums representing income tax from certain payments of yearly interest. This is subject to:

• ITA07/S878 which disapplies this duty to payments of interest made by a bank as defined in ITA07/S991, if that payment is made in the ordinary course of its business.
• ITA07/S885 which disapplies this duty to payments of interest by persons authorised under FISMA 2000 where the person’s business consists wholly or mainly of dealing in financial instruments as principal and that payment is made in the ordinary course of its business.

Statement of Practice 4/96 set out HMRCs interpretation of ‘in the ordinary course of its business’ for the purposes of ITA07/S878 and ITA07/S885 (and the section from which they were derived i.e. ICTA88/S349.)

The statement explained that HMRC would accept that yearly interest was paid in the ordinary course of a bank’s business unless,

• the interest related to the capital structure of the bank, or
• characteristics of the transaction giving rise to the interest were primarily attributable to an intention to avoid UK tax.

HMRC now accepts that interest on borrowing related to capital structures is also paid in the ordinary course of a bank’s business. This includes interest paid by banks as defined in ITA07/S991 and interest paid by persons authorised under FISMA 2000 where that person’s business consists wholly or mainly of dealing in financial instruments as principal. The Statement of Practice was therefore withdrawn on 6 December 2017. This withdrawal does not change HMRC’s view that yearly interest will not be regarded as paid in the ordinary course of business where the characteristics of the transaction giving rise to the interest are primarily attributable to an intention to avoid UK tax. In these circumstance the duty to deduct sums representing income tax under ITA07/S874 is not disapplied.