QUESTION: My company has extended its level of borrowing recently, allowing us to expand and avail of opportunities which have arisen in the market place. A director in the company has made a personal loan to the company and we have also secured loans from two companies, one which is located in the UK and one which is located outside the UK. When we pay interest on each of these loans will there be a requirement to deduct tax at source at 20 per cent before making interest payments to the lenders?
ANSWER: The tax rules differ for each of these loans. Companies (including non-resident companies trading from a branch or agency in the UK and local authorities) must deduct tax from payments of yearly interest they make to a director.
Companies making these deductions are obliged to account for the amounts deducted using the CT61 form. Entries on these forms require disclosure of aggregated amounts paid or credited to the director and must also disclose the tax deducted for the return period.
The CT61 must be submitted to HMRC within 14 days of the end of the quarterly return period and although dates of payments need not be specified on the form, separate figures should be shown for pre and post April 5 interest to reflect any change in the tax rate.
Companies filing a CT61 should also provide a reconciliation of the figures in the CT61 return with the deductions claimed in the accounts for any interest paid to a director.
In contrast, most yearly interest paid to UK companies can be made without deduction of tax at source by the payee and the recipient company is treated as receiving a gross amount of yearly interest. This is treated as a loan relationship credit.
The exception to this rule is where the company receiving the interest is not itself the recipient but is acting as a nominee for the person beneficially entitled to the interest distribution. In such cases income tax will still be deducted at source and the recipient of the interest will be treated as receiving yearly interest with income tax deducted at the basic rate of tax.
The situation is slightly more complex when interest is being paid to a non-UK company. The general rule is that tax should be deducted at the basic rate of tax from all interest paid to an overseas or non-UK corporate lender.
However, if the UK has a double tax agreement (DTA) with the lending country it may be possible to override this position.
To determine whether the DTA allows a reduced withholding tax rate or the removal of the withholding tax requirement altogether, the DTA should be checked, as the rate and rules will vary from country to country.
If relying on the DTA to avoid withholding tax on interest payments the appropriate claim should be made – it is not automatic.
Alternatively, a double taxation treaty passport scheme (DTTP) provides for double taxation relief on UK loan interest payments to an overseas corporate lender. To avail of this the lending company must apply to HMRC.
This passport then allows a UK lender to pay interest to the overseas company without having to deduct tax at source and report this to HMRC.
Borrowers are often not aware of this passport scheme or how it operates and as a result fail to withhold the necessary tax. Lenders also regularly forget to apply for the necessary DTTP clearance.
As a consequence, if the size of the loan is considerable or if the failure to withhold tax remains undetected for a long period of time, significant unexpected liabilities can arise on a UK borrower.
:: Janette Burns (j.burns@pkffpm.com) is associate tax director at PKF-FPM Accountants Limited (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
