On 2 October 2012, HM Revenue & Customs (HMRC) published a summary of industry responses to their earlier consultation paper of 27 March 2012. The consultation paper sought industry views on HMRC’s proposals to amend certain income tax rules affecting interest payments. Taking these responses into account, HMRC have decided to retain some of their earlier proposals in modified form with a view to legislating them in Finance Bill 2013. More significantly, HMRC have decided to withdraw certain other proposals, details of which are set out below. These earlier proposals are also referred to in our Memorandum of 2 April 2012 ‘Proposed Amendments to UK Withholding Tax Rules on Interest Payments’.
Proposal to remove ‘quoted Eurobond’ exemption for certain situations withdrawn
HMRC’s original proposal to remove the ‘quoted Eurobond’ exemption from UK withholding tax in certain circumstances has now been withdrawn, mainly due to its perceived complexity and lack of competitiveness. The original proposal sought to exclude from the scope of the exemption securities issued to non-UK group companies and listed on a stock exchange where there is no substantial or regular trading in those securities. This will be welcome news for the UK Eurobond market.
HMRC have also considered representations by industry members regarding the extent to which UK withholding tax applies to cross-border interest payments and intend to consider these further.
Proposal to widen scope of interest payments subject to UK withholding tax withdrawn
HMRC’s original proposal to remove the requirement for interest to be ‘yearly interest’ in order to attract UK withholding tax has now been withdrawn. This will benefit a wide range of commercial practices, such as intra-group funding arrangements and short-term bridging finance, which currently rely on interest payments being classed as ‘short’ interest in order to remain outside the scope of UK withholding tax. HMRC also intend to clarify their current guidance on ‘short’ loans that are repeatedly rolled over.
Proposal to pay withholding tax to HMRC in cash where the interest is represented by payment-in-kind (PIK) notes, funding bonds, goods, services or vouchers withdrawn
As mentioned in our Memorandum of 2 April 2012, interest payments in non-cash form (e.g. vouchers, funding bonds, PIK notes) have become an increasingly popular cash flow management tool. Luckily, HMRC have decided to withdraw their earlier proposal to require UK withholding tax on the grossed-up value of certain types of non-cash interest to be paid to HMRC in cash rather than in non-cash form. Comments from respondents indicated that not only was HMRC’s proposed gross-up formula unnecessarily complex, but also that such a measure could cause HMRC to become a preferred creditor and thus breach certain banking covenants. Furthermore, the need for businesses in financial difficulties to pay interest in non-cash form outweighed the potential administrative cost to HMRC of managing any bonds or PIK notes representing UK withholding tax.
To address these concerns, issuers of non-cash interest in the form of funding bonds and other interest in kind will be required to produce a certificate showing the value of the bonds/interest in kind. HMRC have yet to clarify how these will be valued for UK withholding tax purposes. Where interest is provided in the form of goods or services, the value of the interest for UK withholding tax purposes will be the retail or market price for those goods or services; and where interest is provided in the form of vouchers, the value of the interest for UK withholding tax purposes will be the face value of the voucher or, where the voucher has little or no face value, the cash equivalent of the goods or services for which the voucher can be exchanged.
HMRC intend to retain some of their earlier proposals, namely:
- To extend the UK withholding tax rules to interest included in compensation payments to individuals;
- To clarify the existing UK ‘source’ rules in relation to interest, so that the location of the agreement or deed evidencing the debt will be irrelevant in determining source; and
- To introduce a generic ‘disguised interest’ rule for UK income tax, modelled broadly on the equivalent rules in the loan relationships code for UK corporation tax. The effect of this rule will mean that structured products which produce a return economically equivalent to interest will attract income tax.
These proposals are broadly the similar to those set out in HMRC’s earlier consultation, with some minor changes. The proposals from the earlier consultation are briefly summarized in our Memorandum of 2 April 2012.
We will continue to monitor these developments and issue further updates where necessary.