Locations
Finance brief
- The Lending Code and Guarantees
- Individual Guarantees: the requirement for independent legal advice
- Regulated Mortgages Briefing paper
- HMRC consults on significant extensions to withholding tax on interest
- A Guide to Financing "Shadow Yachts"
HMRC has, following the recent budget, issued a consultation on changes to the income tax rules on interest. The closing date for comments on the consultation is 22 June 2012 and some time after that HMRC will publish a response document. If any of the changes mentioned in the consultation are to be implemented, which seems likely, draft legislation is expected to be announced in autumn 2012 for inclusion in Finance Bill 2013 (around March 2013). The key changes are summarised below.
"Yearly interest"
The obligation to withhold tax at the basic rate from payments of interest generally only applies to "yearly interest". This term is not defined in legislation and its meaning is based on case law and guidance. HMRC is consulting on removing the concept of "yearly interest" from the withholding tax legislation. If this proposal is implemented, it means that the withholding tax obligation will, in principle, apply to all payments of interest, including "short interest". It is not yet known whether such change would affect existing loans or only new loans. Accordingly, care will be needed when entering into any loan from now on where "short", not yearly, interest is expected.
Although this change would remove the complexity around determining whether interest is "yearly" or not, it does mean that arrangements which previously relied upon this exemption to remove a withholding tax obligation will need to be reviewed to determine whether an alternative exemption is available.Quoted Eurobonds
Currently, interest paid on quoted Eurobonds is exempt from UK withholding tax.
HMRC is proposing to abolish this exemption for quoted Eurobonds where the bond has been issued to a company in the same group as the issuer, and is listed on a stock exchange where there is no substantial or regular trading in the bond.
Quoted Eurobonds have commonly been used for intra-group multi-jurisdictional lending and this change could have a substantial impact. HMRC considers it will raise an extra £200m of tax each year. Again, it is not yet clear whether such change would affect existing funding arrangements.
Disguised interest
Another proposal subject to the consultation is to introduce an anti-avoidance rule aimed at addressing "disguised interest". HMRC considers that income tax anti-avoidance schemes are being used to secure an interest-like return that is not taxed as income. Examples of such schemes include structured products such as certain derivative contracts, warrants, zero coupon bonds or zero rate preference shares.
Any proposed or existing arrangements which make use of such products should be reviewed in the light of this proposed change.
If you would like further information about how the proposed changes may affect you or if you would like to be kept up-to-date with the consultation process and any draft legislation, please contact Jenifer Martin at jennifer.martin@Fieldfisher.com or on 020 7861 4730.