Interest paid in the ordinary course of banking business
If a bank pays short-term interest, other than on a relevant investment (see CFM75050), it does not have to deduct income tax.
If it pays annual interest and the interest is not paid on a relevant deposit, the bank could still potentially be required to deduct tax under ITA07 / PT15 / CH3. However, ITA07 / S878 provides for an exemption from interest paid by a bank in the normal course of business.
A Canadian company places excess funds on a long-term deposit with a UK bank. This is not a relevant repository, therefore ITA07 / PT15 / CH2 does not apply. However, since the company’s place of residence is outside the UK, ITA07 / PT15 / CH3 would normally require a UK interest payer to deduct tax (unless authorization has been given. obtained to pay gross interest under the Double Taxation Agreement between the United Kingdom and Canada). However, since interest is paid by a bank in the normal course of business, the obligation to deduct tax is removed.
“Bank” derives its meaning from ITA07 / S991 – see CFM14060.
Practice Notice 4/96
HMRC’s view, set out in Practice Statement 4/96, is that any annual interest paid by a bank is paid in the ordinary course of business, unless the interest falls within one of the two defined circumstances.
- Interest is not considered paid in the ordinary course of business when the borrowing relates to the capital structure of the bank. Borrowing relates to the capital structure if it meets the definitions of Tier 1, 2 or 3 capital adopted by the Bank of England, whether or not it is included in Tier 1 capital. , 2 or 3 for regulatory purposes.
- Interest is not paid in the ordinary course of business where the transaction giving rise to the interest is primarily due to an intention to avoid UK tax. The CTIAA (Financial Products Team) will advise in all cases where HMRC staff believe this paragraph of the practice statement may be relevant.