United Kingdom - Changes to taxation of interest 

The three significant changes:

• Remove the withholding tax exemption from certain intra-group Eurobonds
• Extend the requirement to withhold tax with respect to “short” interest
• Require withholding tax on funding bonds to be paid in cash

KPMG observation

The measure concerning “short” interest will be good news to taxpayers operating cash pooling arrangements, and the measure on funding bonds will be good news to those funded by private equity (PE) houses.

The HRMC document notes that further consideration is to be given to the requirement to deduct tax from cross-border interest payments, though no details are available at this time.

Proposals for Finance Bill 2013

The proposals that are to be included in Finance Bill 2013 include:

• The introduction of an equivalent for income tax of the disguised interest rules in Chapter 2A Part 6 CTA 2009 (it is also proposed to simplify the “accrued income scheme" and the deep discount securities rules from Finance Bill 2014, but for 2013-14, the position could be complex).
• An amendment to clarify that when interest is paid in kind, the liability is based on the market or retail value of the goods or services, and the borrower is to issue a certificate stating the gross amount of interest.
• The rules on the situs (location) of debt will be amended to clarify the treatment of "specialty debt" to clarify that the meaning of "arising in the UK" would be determined without reference to the location of any agreement or deed evidencing such a debt.
• There will be a requirement to deduct tax from interest included in compensation payments.
• There will be a requirement on the issuer of a funding bond to provide a valuation.

These changes generally will affect individuals more than corporate taxpayers. Draft legislation is due to be published later this year.

Read an October 2012 report [PDF 175 KB] prepared by the KPMG member firm in the UK: Weekly Tax Matters (5 October 2012)