On 11 October 2016, the High Court10 held that statutory interest payable on an insolvency (under rule 2.88(7) IR 1986) is not “yearly interest” for UK tax purposes. Such statutory interest is therefore not subject to UK withholding tax (20%).

The facts of the case are somewhat unusual in that there was a substantial surplus in the administration and the statutory interest was estimated at £5bn. However the decision is a welcome clarification of the position. It also confirms HMRC’s previous guidance on the taxation of statutory interest (subsequently withdrawn).

The Court’s decision was based, in part, on the fact that the right to statutory interest did not accrue over time. Nor was statutory interest under rule 2.88(7) capable of recurrence. Also, as there was nothing akin to a loan here, statutory interest could not “sensibly be equated” to (taxable) yearly interest.

The decision can be viewed here.