CFM75100 - Other tax rules on corporate finance: deduction of tax: interest paid in the ordinary course of banking business

Interest paid in the ordinary course of banking business

If a bank pays short interest, other than on a relevant investment (see CFM75050), it does not have to deduct income tax.

If it pays yearly interest, and the interest is not being paid on a relevant deposit, the bank might still potentially be obliged to deduct tax under ITA07/PT15/CH3. However, ITA07/S878 provides an exemption for interest paid by a bank in the ordinary course of its business.

Example

A Canadian company places surplus funds on a long-term deposit with a UK bank. This is not a relevant deposit, so ITA07/PT15/CH2 does not apply. Nevertheless, since the company's place of abode is outside the UK, ITA07/PT15/CH3 would normally oblige a UK payer of interest to deduct tax (unless clearance had been obtained to pay the interest gross under the Double Taxation Treaty between the UK and Canada). Since, however, the interest is being paid by a bank in the ordinary course of its business, the obligation to deduct tax is switched off.

’Bank’ takes its meaning from ITA07/S991 - see CFM14060.

Statement of Practice 4/96

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 The Statement of Practice was therefore withdrawn on 6 December 2017.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