CheckLists.Tax (beta)
K4. Paying/incurring interest
GENERAL
- Meaning of interest
General idea
- Label attached by the parties is not definitive (NHS ICB, §40).
- Fact that sum was calculated in the same way as interest, also does not make it interest (NHS ICB, §40).
- Including interest in a larger aggregate sum does not stop it being interest (Wilkinson, §60).
- "the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date" (Riches at 400).
- The "general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract... or a statute, or whether the money was due for any other reason in law" (NHS ICB, §45 referring to Riches).
- Need to be compensation for the time value of money, i.e. compensation for the profit the recipient might have made if they had had the money (Wilkinson, §60).
- There needs to be a sum of money, due to the recipient, by reference to which the payment is ascertained (Wilkinson, §60).
No requirement for a legal debt
- No need for an ongoing entitlement to receive a payment:
"there is no requirement that a payee has an ongoing entitlement to receive a payment from a payor for a sum of money which compensates the payee from not having that money earlier to be properly described as interest. I consider the correct tax treatment is determined by considering the true nature of the payment, that is the substance of what is paid and why, and not, as submitted by the ICBs, a detailed technical analysis of subsisting legal rights." (NHS ICB, §46).
- Sum is interest where it is paid in circumstances where it is subsequently determined that earlier payments were excessive and the payer needs to be compensated for being out of his money (NHS ICB, §49).
- Did not matter in NHS ICB that no immediate right or entitlement arose for the patient to have their care costs funded by the NHS at the time the patient had to fund their own care costs (§55).
Compensation re obligation other than to pay money
- Payments by time for non-performance of an obligation (e.g. grant of an underlease) other than payment of money are not interest (Euro Hotel; NHS ICB, §52).
Examples
- Interest on compensation for mis-sold swaps was interest in Wilkinson.
- Damages for fraud including a sum to compensate for failure to receive a payment due to the fraud was interest to that extent in Riches.
- Interest on adjustment payments in relation to contributions to a joint venture was interest in Chevron.
- Interest on redress payments paid by NHS ICBs where the patient had made excessive payments was interest in NHS ICB.
Legislation:
Cases:
Riches v Westminster Bank Ltd [1947] AC 390;
Re Euro Hotel (Belgravia) Ltd [1975] STC 682;
Chevron Petroleum (UK) Ltd & others v BP Petroleum Development Ltd & others 57 TC 137;
Lehman Brothers International (Europe) v. HMRC [2019] UKSC 12;
NHS Mid & South Essex ICB v. HMRC [2024] UKFTT 1117 (TC), Judge Sukul;
HMRC manuals:
Commentary:
See also:
INCOME TAX
- Yearly interest arising in UK paid by a company/person whose usual abode is outside the UK
Obligation to deduct
- Does not depend at all on whether interest is taxable in the hands of the recipient and does not require identification of a "source" for the interest (Lehman Brothers, §57).
Yearly interest
- Where interest is payable in a single lump sum, whether it is yearly interest depends on the period in respect of which the interest is calculated "because that is the period during which the loss of the use of money or property has been incurred, for which the interest is to be compensation" (Lehman Brothers, §52).
- Interest paid by administrators on completion of administration was yearly interest in Lehman Brothers.
- Does not matter whether it is known that a payment of interest will be capable of being made.
- Interest on redress payments was yearly interest in NHS ICB (§56).
Interest in respect of compensation
- Deemed to be yearly interest (s.874(5A)).
- Compensation is "that which returns an individual to the state that they were in had that individual not been subjected to the wrong for which they are to be compensated" (NHS ICB, §58).
Legislation: ITA 2007, s.874;
Cases:
Lehman Brothers International (Europe) v. HMRC [2019] UKSC 12;
NHS Mid & South Essex ICB v. HMRC [2024] UKFTT 1117 (TC), Judge Sukul;
HMRC manuals:
Commentary:
See also:
Deduction at source
Transactions in securities
- Payment of interest probably not a transaction in securities
- Laird Group plc v. IRC: "I would at least pause before attaching such a description to the payment of interest on a debt merely because it was secured by a debenture or unsecured loan note" (§29).
Legislation:
Cases: Laird Group plc v. IRC [2003] UKHL 54;
HMRC manuals:
Commentary:
See also:
Settlements legislation
- Borrower from trust paying excessive interest may become settlor
- If the arrangement involves bounty.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Loan to invest in partnership
Interest on loan taken out to invest in partnership is not a partnership expense
"[50] Putting this another way, I agree with Mr Rivett’s distinction between expenses which a partner incurs in its capacity as an investor in a partnership and expenses which that partner incurs in pursuing the trading purposes of that partnership. Expenses falling within the second category are the ones to which Lord Justice Henderson was referring in his judgment in Vaines. In my view, his judgment has no relevance to expenses falling within the first category." (Shiner v. HMRC [2020] UKFTT 295 (TC), Judge Beare)
Legislation:
Cases: Vaines v. HMRC [2018] EWCA Civ 45;
HMRC manuals:
Commentary:
See also: