On 27 March 2012 HMRC issued a consultation document looking at various issues in connection with the taxation of certain types of interest received and the deduction of tax at source. The consultation covers the following areas:
- The identification of the interest element of compensation payments and deduction of tax at source, “to enable the tax treatment of interest included in such payments to be put on a clear footing”;
- The abolition of the concept of yearly interest to “eliminate the need for payers of interest to consider whether it amounts to ‘yearly interest’ [and so whether income tax should be deducted] and would remove the cliff edge that may lead to contractual terms being inserted into a loan agreement merely in order to avoid it being treated as ‘yearly’;”
- The treatment of interest in kind to “provide a clearer framework for the taxation of interest in kind, and make the rules easier to apply both for individuals and businesses”;
- The treatment of disguised interest with a view to simplifying the legislation on the accrued income scheme and on deeply discounted securities.
The consultation will also look at changes to the rules applying to quoted Eurobonds and funding bonds.
Although these proposals are aimed at simplification and clarification, the proposals potentially widen the type of transactions which will have an interest element, and therefore impose a deduction of income tax at source which is unlikely to be repayable to non-taxpayers.