C2Part 15Deduction of income tax at source
Chapter 3Deduction from certain payments of yearly interest
Duty to deduct sums representing income tax
C1C4C5C8874C4Duty to deduct from certain payments of yearly interest
1
This section applies if a payment of yearly interest arising in the United Kingdom is made—
a
by a company,
b
by a local authority,
c
by or on behalf of a partnership of which a company is a member, or
d
by any person to another person whose usual place of abode is outside the United Kingdom.
2
The person by or through whom the payment is made must, on making the payment, deduct from it a sum representing income tax on it at the F2basic rate in force for the tax year in which it is made.
3
But see—
a
sections 875 to F26888E as to circumstances in which the duty to deduct a sum under this section is disapplied, and
b
Chapter 11 (payments between companies etc) for a further exception from the duty to deduct under this section.
4
See also regulations made under section 17(3) of F(No.2)A 2005 (authorised investment funds)—
a
for provision treating certain amounts shown in the distribution accounts of authorised investment funds as payments of yearly interest, and
b
for exceptions from the duty to deduct under this section which would otherwise apply to such payments.
5
For the purposes of subsection (1) the following are to be treated as payments of yearly interest—
a
a payment of interest made by a F16registered society in respect of any mortgage, loan, loan stock or deposit, and
b
any interest, dividend, bonus or other sum payable to a shareholder of such a society by reference to the amount of the shareholder's holding in the share capital of the society.
F115A
For the purposes of subsection (1) a payment of interest which is payable to an individual in respect of compensation is to be treated as a payment of yearly interest (irrespective of the period in respect of which the interest is paid).
5B
But the Commissioners for Her Majesty's Revenue and Customs may make regulations which provide that subsection (5A) does not apply in the circumstances prescribed in the regulations.
6
For the purposes of subsection (1)—
a
a payment made by a company in a fiduciary or representative capacity is not to be treated as a payment made by the company, and
b
a payment made by a local authority in a fiduciary or representative capacity is not to be treated as a payment made by the local authority.
F126A
In determining for the purposes of subsection (1) whether a payment of interest arises in the United Kingdom no account is to be taken of the location of any deed which records the obligation to pay the interest.
7
For provision about the collection of income tax in respect of a payment from which a sum must be deducted under this section—
a
see Chapter 15 if the person making the payment is a UK resident company, and
b
otherwise see Chapter 16.
Exceptions from duty to deduct
875Interest paid by building societies
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest made by a building society F13unless it is treated as a payment of yearly interest by virtue of section 874(5A).
F21876Interest paid by deposit-takers
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on an investment if—
a
the payment is made by a deposit-taker, and
b
when the payment is made, the investment is a relevant investment.
1A
In this section “deposit-taker”, “investment” and “relevant investment” have the meaning given by Chapter 2.
877UK public revenue dividends
C3C6878Interest paid by banks
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest made by a bank if that payment is made in the ordinary course of its business.
F141A
But that duty does apply to such a payment if it is treated as a payment of yearly interest by virtue of section 874(5A).
2
Section 991 (meaning of “bank”) applies for the purposes of this section.
879Interest paid on advances from banks
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on an advance from a bank if, at the time when the payment is made, the person beneficially entitled to the interest is within the charge to corporation tax as respects the interest F4or is a bank that would be within the charge to corporation tax as respects the interest apart from section 18A of CTA 2009.
2
Section 991 (meaning of “bank”) applies for the purposes of this section.
3
Subsection (1) applies to the European Investment Bank as if the words from “if” to the end were omitted.
4
An order under subsection (2)(e) of section 991 designating an international organisation as a bank may provide that subsection (1) applies to the organisation with the modification mentioned in subsection (3).
880Interest paid on advances from building societies
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on an advance from a building society.
881National Savings Bank interest
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on deposits with the National Savings Bank.
882Quoted Eurobond interest
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on a quoted Eurobond (see section 987).
883Interest on loan to buy life annuity
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest to which section 369 of ICTA applies (interest on loan to buy life annuity payable under deduction of tax).
884Relevant foreign income
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest which is chargeable to income tax as relevant foreign income.
2
For the meaning of “relevant foreign income”, see section 989.
C7885Authorised persons dealing in financial instruments
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest made by a person authorised for the purposes of FISMA 2000 if—
a
the person's business consists wholly or mainly of dealing in financial instruments as principal, and
b
the payment is made by that person in the ordinary course of that business.
2
For the meaning of “financial instrument”, see section 984.
C9886Interest paid by recognised clearing houses etc
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest made by a F5relevant entity if—
a
b
the interest is paid in the ordinary course of that business, on margin or other collateral deposited with it by users of the service F30or as a central securities depository.
2
The duty to deduct a sum representing income tax under section 874 does not apply to interest treated by virtue of section 607 (treatment of price differences under repos)F1, or paragraph 5 of Schedule 13 to FA 2007 (relief for borrower for finance charges in case of debtor repos and debtor quasi-repos), as paid by F7a relevant entity in respect of contracts made by it as the provider of a central counterparty clearing service F27or as a central securities depository .
3
In this section—
“central counterparty clearing service” means the service provided by F8a relevant entity to the parties to a transaction where there are contracts between each of the parties and F8the relevant entity (in place of, or as an alternative to, a contract directly between the parties), and
F10“relevant entity”, means any of the following (as defined for the purposes of FISMA 2000 by section 285 of that Act)—
F9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
887F15Payments made by registered societies
1
The duty to deduct a sum representing income tax under section 874 does not apply to either of the following payments if they are payable to a person whose usual place of abode is in the United Kingdom—
a
a payment of interest made by a F17registered society in respect of any mortgage, loan, loan stock or deposit, or
b
any interest, dividend, bonus or other sum payable to a shareholder of such a society by reference to the amount of the shareholder's holding in the share capital of the society.
2
A F18registered society must, within 3 months after the end of each of its accounting periods, deliver to an officer of Revenue and Customs a return containing the information mentioned in subsection (3).
3
That information is—
a
the name and place of residence of every person to whom the society has, as a result of this section, made one or more payments in the period amounting in total to at least £15 without deducting a sum (or sums) representing income tax, and
b
the amount so paid in the period to each of those persons.
4
See F3section 500(2) of CTA 2009 as to the consequences of not making a return as required by subsection (2).
F195
In this Chapter “registered society” means—
a
a registered society within the meaning of the Co-operative and Community Benefit Societies Act 2014,
b
a society registered or treated as registered under the Industrial and Provident Societies Act (Northern Ireland) 1969.
c
a society registered as a credit union under the Credit Unions (Northern Ireland) Order 1985 (S.I. 1985/1205 (N.I. 12)), or
d
an SCE formed in accordance with Council Regulation (EC) No 1435/2003 on the Statute for a European Cooperative Society.
6
For the purposes of this section crediting interest (or amounts treated as interest) counts as paying it.
888Statutory interest
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest made by virtue of the contractual term implied by section 1(1) of the Late Payment of Commercial Debts (Interest) Act 1998 (c. 20) (statutory interest).
888AF20Qualifying private placements
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on a qualifying private placement.
2
“Qualifying private placement” means a security—
a
which represents a loan relationship to which a company is a party as debtor,
b
which is not listed on a recognised stock exchange, and
c
in relation to which such other conditions as the Treasury may specify by regulations are met.
3
The conditions which may be specified under subsection (2)(c) include conditions relating to—
a
the security itself,
b
the loan relationship represented by the security,
c
the terms on which, or circumstances under which, the security or loan relationship is entered into,
d
the company which is party to the loan relationship as debtor,
e
any person by or through whom a payment of interest on the security is made, or
f
the holder of the security.
4
Regulations under this section may make provision about the consequences of failing to make a deduction under section 874, in respect of a payment of interest on a security, in cases where the person required to make the deduction had a reasonable, but mistaken, belief that the security was a qualifying private placement.
5
Regulations under this section may—
a
make different provision for different cases;
b
contain incidental, supplemental, consequential and transitional provision and savings.
6
In this section “loan relationship” has the same meaning as in Part 5 of CTA 2009.
888BF24Designated dividends of investment trusts
The duty to deduct a sum representing income tax under section 874 does not apply to a dividend so far as it is treated as a payment of yearly interest by regulations under section 45 of FA 2009 (dividends designated by investment trust or prospective investment trust).
888CInterest distributions of certain open-ended investment companies
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of yearly interest under section 373 of ITTOIA 2005 (in the case of certain open-ended investment companies, payments of yearly interest treated as made where distributable amount shown in accounts as yearly interest).
888DInterest distribution of certain authorised unit trusts
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of yearly interest under section 376 of ITTOIA 2005 (in the case of certain authorised unit trusts, payments of yearly interest treated as made where distributable amount shown in accounts as yearly interest).
888DAF32Payments of interest by a QAHC
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest (however the interest arises) by a QAHC (within the meaning of Schedule 2 to FA 2022).
888EF25Interest on certain peer-to-peer lending
1
The duty to deduct a sum representing income tax under section 874 does not apply to a payment of interest on an amount of peer-to-peer lending.
2
In subsection (1) “peer-to-peer lending” means credit in relation to which the condition in subsection (4) is met.
3
In this section—
“original borrower”, in relation to any credit, means the person to whom the credit is originally provided,
“credit” includes a cash loan and any other form of financial accommodation, and
“original lender”, in relation to any credit, means the person who originally provides the credit.
4
The condition is that—
a
the original borrower and the original lender enter the agreement under which the credit is provided at the invitation of a person (“the operator”),
b
the operator makes the invitation in the course of, or in connection with, operating an electronic system,
c
the operator's operation of the electronic system is an activity specified in article 36H(1) or (2D) of the Order (operating an electronic system in relation to lending), and
d
the operator has permission under Part 4A of FISMA 2000 to carry on that activity.
5
For the purposes of subsection (4), it does not matter if the agreement mentioned in subsection (4)(a) is not an article 36H agreement (as defined in article 36H of the Order).
6
The Commissioners for Her Majesty's Revenue and Customs may by regulations make such amendments of the preceding provisions of this section as they consider appropriate in consequence of—
a
the Order, or any part of it, being replaced (or further replaced) by provision in another instrument, or
b
any amendment of the Order or any such other instrument.
7
In this section “the Order” means the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544).
Pt. 15 modified (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), ss. 551(4), 1329(1) (with Pts. 1, 2, Sch. 2 para. 78)