Revenue & Customs Brief 47/08 sets out its policy on deduction of tax at source from interest that is treated as a distribution under section 209(2) of the Income and Corporation Tax Act (ICTA) 1988. It will be relevant to companies that issue securities, and their professional advisers.

ICTA88 s209(2) sets out particular circumstances in which all or part of the interest paid by the issuer of a security is treated as a distribution for Corporation Tax purposes. The company cannot claim a tax deduction for interest that comes within the statutory provisions concerned. In the hands of a UK recipient, it is taxed as if it were a company dividend not interest.

Section 874 requires income tax to be withheld from payments that have the character of interest. Once s209(2) treats a payment as a distribution, it no longer has that required character of interest and it is not ‘yearly interest’ to which section 874 applies. No withholding is therefore required. HMRC therefore confirm that there is no requirement to deduct tax at source under section 874 ITA 2007 from interest that is treated as a distribution. For further details please see http://www.hmrc.gov.uk/briefs/company-tax/brief4708.htm.