HM Revenue & Customs (HMRC) published on 27th March 2012 a consultation paper with proposals to amend certain income tax rules affecting interest payments. HMRC are accepting comments on these proposals until 22nd June. Key proposals include:

  • removing the 'quoted Eurobond' exemption from UK withholding tax on interest payable in respect of issues of securities to non-UK group companies under certain circumstances;
  • increasing the scope of interest payments that are subject to UK withholding tax; and
  • a requirement that all UK withholding tax on funding bonds (e.g. payments-in-kind (PIK) notes) representing interest and other interest payments in the form of assets (such as goods or vouchers) be paid to HMRC in cash.

Removing the 'quoted Eurobond' exemption from UK withholding tax on interest payable on securities issued to non-UK group companies under certain circumstances

HMRC propose to remove the 'quoted Eurobond' exemption for securities issued to non-UK group companies and listed on a stock exchange where there is no substantial or regular trading in those securities. 'Quoted Eurobonds' for the purposes of the exemption are interest-bearing securities that are issued by a company and listed on a recognized stock exchange. At present, there is no requirement for the securities to be regularly traded on that exchange. HMRC view some of these arrangements as having been undertaken for the purpose of circumventing UK withholding tax as opposed to facilitating the raising of finance in the capital markets from external non-UK lenders.

The proposal if implemented could have significant implications for groups who have relied on the 'quoted Eurobond' exemption in relation to group debt lent into the UK.

Increasing the scope of interest payments that are subject to UK withholding tax

HMRC propose to amend the withholding tax rules by removing the requirement for interest to be 'yearly interest' in order to attract UK withholding tax. The effect of this would be to impose withholding tax at 20% on all payments of UK source interest, not just yearly interest. Currently, interest paid on loan agreements with a term of less than one year does not generally attract UK withholding tax. If this proposal is implemented, this will cease to be the case.

Imposing a cash withholding tax charge on interest paid in kind (goods/ vouchers) and on funding bonds such as payments-in-kind (PIK) notes representing interest

Interest payments in non-cash form such as vouchers and PIK notes have become increasingly popular with, respectively, some retailers and financial institutions in order to manage cash flow.

HMRC are seeking views on proposals to clarify the rules on cash withholding tax obligations with respect to vouchers or PIK notes used to satisfy interest obligations. Of particular interest to PIK note issuers is the fact that any withholding tax currently paid to HMRC by means of an issue of PIK notes to HMRC would instead be payable in cash.

Other proposals

Other proposals made by HMRC include:

  • clarifying and extending the rules on withholding tax on interest on, or included in, compensation and damages payments;
  • clarifying the 'source' rules in relation to interest so that the location of the deed or agreement evidencing the debt is irrelevant in determining whether the interest has a UK source; and
  • extending the 'disguised interest' rules, currently included in the loan relationships code for corporation tax purposes, to the income tax code, so that structured products involving derivatives, zero coupon bonds, zero rate preference shares, warrants or other financial arrangements which produce an interest-like return would be subject to income tax on that return as interest.

We will continue to monitor these proposals and let you know as things develop.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.