Changes to income tax rules on interest - consultation

This consultation affects persons who are subject to income tax on interest in accordance with the Income Tax (Trading and Other Income) Act 2005, or who are required to deduct income tax from interest and other payments in accordance with the Income Tax Act 2007.

Publication date: 27 March 2012

Closing date for comments: 22 June 2012

Subject of this consultation:	Views are invited on proposals for changes to income tax rules on the taxation of interest received, and rules on the deduction of tax from interest paid.
Scope of this consultation:	This consultation covers the income tax rules on the taxation of interest and interest-like returns, and rules on the deduction of tax at source from such amounts. The aim is to address a number of current issues in the field of the taxation of interest. We also wish to gain a better understanding of the impacts if any changes were made to the current rules.
Who should read this:	HMRC would like to hear from tax practitioners, individuals who are subject to the income tax rules on savings and investment income in Part 4 of the Income Tax (Trading and Other Income) Act 2005, and financial institutions and others who pay interest under deduction of tax.
Duration:	27 March 2012 to 22 June 2012.
Lead official:	Tony Sadler, HM Revenue and Customs.
How to respond or enquire about this consultation:	Responses should be sent by email to tony.sadler@hmrc.gsi.gov.uk , or to Tony Sadler, HM Revenue and Customs, Room 3c03, 100 Parliament Street, London SW1A 2BQ.
Additional ways to be involved:	Please indicate whether you are willing to discuss these issues with HMRC. HMRC will consider meeting interested parties to discuss the issue raised in this consultation. The timing, format and venue of these meetings will be informed by the expressions of interest received.
After the consultation:	A response document will be published. Responses will influence any legislative changes taken forward. If legislation (including repeal of legislation) follows in Finance Bill 2013, this will be published in draft in autumn 2012.
Getting to this stage:	This consultation focuses on issues relating to the taxation of, and deduction of tax from interest, which HMRC has become aware of through recent enquiries from and correspondence with taxpayers, tax practitioners and financial institutions.
Previous engagement:	None.

Contents

1 Executive Summary

2 Other consultations on related subjects

3 Interest included in compensation payments

4 Yearly interest arising in the UK

5 Quoted Eurobonds

6 Interest in kind and funding bonds

7 Disguised interest

8 Taxes Impact Assessment

9 The Consultation Process: How to respond

Annex A The Code of Practice on Consultation

Annex B Relevant Legislation

On request this document can be produced in Welsh and alternative formats including large print, audio and Braille formats

1. Executive Summary

1.1 This consultation invites comments on possible changes to income tax rules on the taxation of interest received, and on deduction of income tax from interest paid. The income tax provisions on the taxation of interest and other types of savings and investment income are set out in Part 4 of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’). The statutory provisions on the duty to deduct income tax from various types of payment, including interest, are set out in Part 15 of the Income Tax Act 2007 (‘ITA’). There is also an extensive and long-standing body of income tax case law on these subjects.

1.2 The Government is considering a number of legislative changes to these rules to address current problems in their application. Comments are invited on the following proposals.

• A new rule in Chapter 2 of Part 4 of ITTOIA to determine the interest component in compensation payments.
• New rules in Chapters 2 and 3 of Part 15 of ITA to provide for deduction of tax at source from the interest component in compensation payments.
• In relation to the rules on deduction of income tax, the abolition of the concept of ‘yearly interest’, and a change to the meaning of the term ‘yearly interest arising in the UK’.
• A change to the exemption from the requirement to deduct tax from quoted Eurobonds for certain intra-group transactions.
• A new rule to put the tax treatment of ‘interest in kind’ beyond doubt.
• A new ‘disguised interest’ rule to address income tax avoidance in relation to interest.

1.3 HMRC consulted in 2010 on changes to the procedures for the collection of income tax deducted at source by companies, local authorities and individuals. See Chapter 2 for more details. The proposals in that consultation do not affect the proposals in this document.

1.4 The proposals in this consultation document do not affect:

• ·the taxation or deductibility of interest paid and received in the course of a trade or property business;
• ·the operation of most aspects of the Tax Deduction Scheme for Interest (TDSI) in Chapter 2 of Part 15 of ITA under which income tax is deducted at source from interest paid by deposit-takers and building societies;
• ·any other arrangements under which tax is deducted at source.

1.5 This consultation corresponds to stages 1 and 2 of the Government’s Tax Consultation Framework. Any changes to the legislation in question in the light of this consultation and responses to it will be made in Finance Act (‘FA’) 2013.

2. Other consultations on related subjects

2.1 HMRC issued a consultation document on 5 March 2010 inviting comments on possible changes to the tax rules on the deduction of income tax at source (customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_030218). This concerned the collection procedures under which companies and individuals deduct income tax from interest and similar payments and account to HMRC for it. These procedures are set out in Part 15 of ITA 2007.

2.2 Consideration is being given to the responses received to the consultation document issued on 5 March 2010, and further proposals may be issued in due course. Any such proposals will be separate from the issues discussed in this consultation document.

3. Interest included in compensation payments

3.1 Income tax is charged on interest in accordance with Chapter 2 of Part 4 of ITTOIA. Some other types of payment, such as discounts and certain amounts paid by building societies and collective investment vehicles, are treated as if they were interest for income tax purposes.

3.2 The term ‘interest’ is not defined in the Taxes Acts. It is a concept of common and contract law. It is commonly defined as a return for the use or retention by one person of a sum of money belonging to or owed to another.

3.3 The question commonly arises as to whether a lump sum awarded as compensation or damages (whether by a court or tribunal or under an out-of-court settlement) contains an element of interest. Broadly, a calculation of interest may be used as a means of arriving at the amount of a lump sum payment for compensation or damages. The compensation itself will normally be a capital sum, but interest on it (following the tax case of Westminster Bank Ltd v Riches 28TC159) will be taxable as ‘interest of money’.

3.4 Whether something is ‘interest of money’ depends on the facts of the arrangement, or sometimes on specific statutory provisions. For example, in the case of local authority payments for compulsory purchase, there may be a statutory requirement to pay interest.

3.5 For many types of compensation the tax treatment is long established and presents no problems. HMRC’s view of the tax treatment in such cases is set out in its Savings and Investment Manual (www.hmrc.gov.uk/manuals/saimmanual/SAIM2070.htm). There are, for example, statutory exemptions from capital gains tax for compensation for personal injury and compensation for certain mis-sold life insurance policies. The statutory exemption for compensation for mis-sold pensions includes the interest included in such payments.

3.6 However, compensation for other forms of financial mis-selling sometimes raises difficulties. Such instances have increased in recent years. Where an amount paid in compensation is calculated by reference to interest for the period that a claimant or investor does not have use of the funds, it is likely to constitute interest, and unless specifically exempt is taxable as such.

3.7 No problem occurs in straightforward cases, such as those where the Financial Ombudsman Service (FOS) orders a firm to return a customer’s capital. But in other cases it may be difficult to identify the interest component of the compensation. For example, in certain FOS cases, compensation for the ‘investment loss’ (what would otherwise have happened to the investor’s money) may depend on whether the customer still has the product or has disposed of it. In cases covered by the Financial Services Compensation Scheme (FSCS) (where a firm is unable to pay claims) the total compensation paid may be calculated on the basis of a formula that reflects the interest that would have been due to the investor, notionally net of tax they would have suffered. However, such compensation is not actually interest and no tax is actually deducted. Non-taxpayers will be unable to reclaim such ‘tax deducted’, and higher (and additional) rate taxpayers will not be assessable on such ‘interest’ received.

3.8 Legislation was introduced in Finance Act 2009, prompted by compensation payments made by the FSCS in response to the collapse of some banks. This legislation addressed a particular problem relating to those FSCS payments. Section 380A of ITTOIA now provides for payments ‘representing interest’ to be treated as interest for tax purposes. As a consequence, a non-taxpayer or a higher-rate taxpayer can be treated as if they had received interest under deduction of tax, and can claim a refund or be assessed to higher rate income tax accordingly.

3.9 However, this legislation only applies in restricted cases to particular payments made under the FSCS, and would not apply to payments required by the FOS, or to awards or ex-gratia payments made by government ombudsmen, government departments, regulated entities, employment tribunals and other bodies, where similar problems can arise.

3.10 Typically difficulties with such amounts arise at short notice in response to particular features of the compensation, before a Finance Bill measure can be introduced to deal with them. Adapting the existing power relating to FSCS payments ‘representing interest’, so that it can apply to similar amounts paid by other bodies, would allow such problems to be addressed as they emerge. This would provide greater certainty for taxpayers and their advisers on the correct tax treatment in such cases.

3.11 The extended power would not impose any new requirement to deduct tax by the FSCS or any similar body paying compensation. It would merely enable the tax treatment of interest included in such payments to be put on a clear footing.

3.12 However, there are some cases where an amount of interest is paid in addition to the compensation, and is clearly taxable as such, but the deduction of tax rules do not apply clearly. For example, whether or not tax is to be deducted may depend on the institution making the payment. If the payment is made to a customer directly by a bank, there is no requirement on the bank to deduct tax on this interest under the Tax Deduction Scheme for Interest (TDSI) or otherwise, where the amount is ‘yearly interest’ and is paid in the ordinary course of the bank’s business. However, where the interest is ‘yearly interest’ paid by a non-bank or building society (even in a banking or building society group), there is a requirement to deduct tax. This is confusing for the institution paying such compensation, and for the person receiving the compensation.

3.13 The Government’s preferred approach to this is as follows.

• The regulation and order making powers in the TDSI rules in Chapter 2 of Part 15 ITA would be extended so that compensation payments can be designated as ‘relevant investments’ and hence made subject to TDSI. So, where interest from which tax is deductible is paid by a deposit-taker or a building society, the institution would deduct the tax when the interest is paid and include it in its TDSI return.
• Other bodies, including entities that are members of a group that includes deposit-takers and building societies, but are not themselves deposit-takers or building societies, would deduct tax in accordance with the rules in Chapter 3 of Part 15 of ITA. These rules apply to ‘yearly interest’, but as explained in Chapter 4 of this consultation document, Chapter 3 of Part 15 of ITA would be amended so that they apply to all interest, whether ‘yearly’ or not. It would then be clear that interest included in one-off compensation payments made by any body not within the TDSI rules would fall within Chapter 3, and subject to a requirement to deduct tax.

3.14 In summary, the changes proposed in this chapter of this consultation are that:

• Section 380A of ITTOIA would be amended or extended so that, through secondary legislation, it could be applied generally to ‘payments representing interest’ included in compensation payments.
• Chapter 2 of Part 15 of ITA would be amended so that compensation payments made by deposit-takers and building societies can be included in the TDSI rules.
• Chapter 3 of Part 15 of ITA would be amended so that interest included in compensation payments made by bodies outside the TDSI rules would be subject to deduction of tax at source.

3.15 It is envisaged that these changes will have a negligible effect on Exchequer receipts, as there will be no change to the rules on what constitutes interest for income tax purposes. Deduction of basic rate income tax from interest included in compensation payments will bring forward the collection of tax, but the impact on tax revenues is expected to be minor. However, by making the application of the rules on deduction of tax at source more certain, the changes will provide protection against the risk of future tax loss and reduce the administrative burden on businesses that make compensation payments that include interest, as well as on HMRC and on the recipients of such interest. The overall likely impact of such changes is estimated to be negligible.

3.16 Comments are invited on these proposed changes, and on whether they would have any unforeseen or adverse impacts on individuals or businesses.

4. Yearly interest arising in the UK

4.1 Part 15 of ITA sets out the circumstances in which income tax must be deducted from payments such as interest. Most interest received by individuals is paid by banks and building societies, and tax deducted from it under the TDSI scheme in Chapter 2 of Part 15 of ITA. Where interest does not fall within Chapter 2 of Part 15 of ITA, it is likely to fall within Chapter 3, which imposes a duty certain on persons to deduct income tax from payments of ‘yearly interest arising in the UK’.

4.2 Section 874 of ITA applies to ‘yearly interest’ paid by a company, a local authority, a partnership of which a company is a member, and by a person to another person whose usual place of abode is outside the UK. There are a number of important exceptions from the requirement to deduct tax under section 874. These are in sections 875 to 888, and include payments of interest to and by banks, building societies and similar institutions, and interest on commercial debts. In addition, Chapter 11 of Part 15 of ITA exempts inter-company payments from the requirement to deduct tax.

4.3 Two common points of contention in relation to these rules are:

• whether interest is ‘yearly interest’;
• whether interest ‘arises in the UK’ - that is, does it have a ‘UK source’?

‘Yearly interest’

4.4 The distinction between yearly (or ‘annual’) interest, and interest that is not yearly (usually referred to as ‘short’ interest), goes back to the origins of the income tax system. There is a substantial body of case law on what constitutes yearly interest. HMRC’s Savings and Investment Manual (www.hmrc.gov.uk/manuals/saimmanual/SAIM9075.htm) has more details on this.

4.5 This case law is not always straightforward in its application to the facts of a particular case. Whether or not interest is ‘yearly interest’ is not simply determined by the duration of the loan. More recent cases emphasise the importance of the intentions of the parties when making the arrangement under which the interest is paid. However, these intentions are not always easy to determine, for example in cases where interest is paid under a statutory obligation.

4.6 It is often observed that the concept of yearly interest is now somewhat archaic and of relevance only to the question of whether tax should be deducted at source. There is no distinction between yearly and short interest for the purposes of the TDSI scheme under which most bank and building society interest is paid.

4.7 In view of this, views are invited on the removal of references to ‘yearly’ interest throughout Chapter 3 of Part 15 ITA so that deduction of income tax would be required in all cases where interest is not otherwise covered by the rules in Part 15 of ITA. Such a changes would eliminate the need for payers of interest to consider whether it amounts to ‘yearly interest’ and would remove the cliff edge that may lead to contractual terms being inserted into a loan agreement merely in order avoid it being treated as ‘yearly’.

4.8 This change would leave unaffected the exemptions from the requirement to deduct income tax set out in sections 875 to 888 of ITA, and in Chapter 11 of Part 15 of ITA in relation to inter-company payments. Some consequential amendments to secondary legislation that refers to yearly interest would be needed.

‘Arising in the UK’

4.9 Whether or not interest ‘arises in the UK’ is particularly relevant to payments made to persons who are not UK resident. The issue is often summarised as a question of whether interest has a ‘UK source’.

4.10 For simple contract debts, UK source is determined following the principles applied in the case of Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece (46TC472). These principles include the territory in which the debtor can be sued, the place of payment of the interest and the security for the debt.

4.11 For ‘debts under seal’ or ‘specialty debt’ it is sometimes argued that case law supports the view that interest paid on such debts does not have a UK source where the loan agreement is physically held outside the UK, and hence that income tax is not required to be deducted at source.

4.12 HMRC does not accept this argument. However, to put the matter beyond doubt, the Government proposes to amend the relevant provisions of Chapter 3 of Part 15 of ITA so that the question of whether or not interest arises in the UK is established without reference to the location of the agreement or deed evidencing the debt.

4.13 In summary, the changes proposed in this chapter of this consultation are that:

• Chapter 3 of Part 15 of ITA would be amended so that it applies to all payments of interest not otherwise covered by the rules in Part 15, not just to ‘yearly interest’.
• Section 874 of ITA would be amended so that whether or not interest is interest ‘arising in the UK’ would be determined without reference to the location of any agreement of deed evidencing the debt.

4.14 It is envisaged that these changes will have a negligible effect on Exchequer receipts as the amount of additional interest brought into the charge to tax is expected to be small, with the effect being mainly confined to earlier collection of tax. The impact on the majority of individuals and businesses is therefore expected to be negligible. The changes will, however, simplify the legislation on the application of the rules on the deduction of income tax from interest, and remove an opportunity to avoid deduction of tax where interest is paid to a non-UK resident.

4.15 Comments are invited on these proposed changes, and on whether they would have any unforeseen or adverse impacts on individuals or businesses.

5. Quoted Eurobonds

5.1 The obligation to deduct income tax from payments of yearly interest imposed by Chapter 3 of Part 15 of ITA is disapplied if the instrument on which the interest is paid is a quoted Eurobond (section 882 ITA). Broadly, in the UK Eurobonds are securities denominated in non-Sterling currencies. A quoted Eurobond is defined for the purposes of the rules on deduction of tax at section 987 ITA as an interest bearing security issued by a company, and listed on a recognised stock exchange. The exemption from the requirement to withhold tax was introduced in 1984 partly to facilitate the raising of external finance by companies from third party non-UK lenders through the issue of Eurobonds.

5.2 The quoted Eurobond exemption was one of the reliefs considered by the Office of Tax Simplification (OTS). The OTS Review of Tax Reliefs Final Report (www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf) of March 2011 (page 175) noted that the exemption encourages the growth of the UK Eurobond market, and recommended its retention.

5.3 However, in recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required.

5.4 The Government invites views on amending the quoted Eurobond exemption so that it would not apply where the Eurobond is issued to a fellow group company, and listed on a stock exchange on which there is no substantial or regular trading in the Eurobond. The effect of the amended rule would be to leave untouched the quoted Eurobond exemption for the overwhelming majority of Eurobond issues. It would deny the exemption only in the case of intra-group Eurobond issues that appear to be undertaken for the purpose of circumventing the requirement to deduct tax at source rather than being directed at the raising of third party finance.

5.5 Information available from the Grand Cayman Stock Exchange and Channel Islands Stock Exchange show at least £15 billion of Eurobonds in issuance by UK groups in these locations. Details of intra-group holdings are not given, but it is reasonable to assume that a substantial proportion does in fact relate to intra-group issues, and on this basis the potential Exchequer impact of withdrawing the quoted Eurobond could be around £200m p.a.

5.6 Comments are invited on the impact of the proposal to amend the quoted Eurobond exemption so that it would not apply to Eurobonds listed on stock exchanges where there is no substantial or regular trading.

6. Interest in kind and funding bonds

6.1 A growing number of financial institutions and retailers are offering, or have expressed the wish or intention to offer, interest in non-cash form, typically in goods or vouchers. Although interest paid in kind is taxable in the same way as interest paid in cash, a number of practical difficulties may arise in the valuation of such interest, and in applying the rules on deduction of tax at source. The Government invites views on the introduction of specific legislation in Part 4 of ITTOIA to set out the tax treatment of interest in kind. A similar issue exists in relation to funding bonds and views are invited on proposals to amend the relevant legislation in Part 15 of ITA.

Interest in kind

6.2 Where any non-cash interest is payable, tax would be paid in cash to HMRC on the ‘grossed up’ amount of the non-cash interest, in accordance with the formula in section 998 of ITA. This formula is GA = NA + (NA x R\(100-R)), where GA is the gross amount, NA is the net amount, and R is the percentage rate of tax by reference to which the net amount is to be grossed up.

6.3 Example 1: 100 interest is paid wholly in goods or vouchers. Applying the grossing up formula the gross amount is 100 + (100 x 20\80) = 125. Tax of 25 would be payable in cash to HMRC. This tax would be reclaimable by a non-taxpayer, and would be set against higher rate tax liability on the gross interest receivable of 125.

6.4 Example 2: 50 interest is payable in cash and 50 in vouchers or goods. 10 is deductible from the cash interest in accordance with the current rules in Part 15 of ITA. The non-cash component would be taxed in accordance with the formula in section 998 of ITA. The gross amount is 50 + (50 x 20/80) = 62.50. Tax of 12.50 would be payable in cash in respect of the non-cash component. The total tax of 22.50 would be reclaimable by a non-taxpayer, and would be set against higher rate tax liability on the gross interest receivable of 112.50.

6.5 The cash equivalent of the non-cash consideration would be valued as the higher of:

• the face value of the goods, services or vouchers;
• the maximum retail price of the goods or services supplied or for which vouchers may be exchanged;
• the cost of the goods or services supplied or for which vouchers may be exchanged.

6.6 The tax deductible from the grossed up amount would be payable to HMRC in cash.

6.7 Although HMRC has seen only a few cases to date of a return on borrowing being offered wholly or partly in the form of interest in kind instead of cash, increasing numbers of enquiries are being received on this point. The changes proposed will provide a clearer framework for the taxation of interest in kind, and make the rules easier to apply both for individuals and businesses.

Funding bonds

6.8 A similar problem exists in relation to funding bonds. These are shares or loan notes that are issued by a debtor to pay interest, usually where the debtor has insufficient money to pay the interest in cash. Where a funding bond is used to pay interest, specific legislation (section 380 of ITTOIA) treats the issue of a funding bond as a payment of interest equal to the market value of the funding bond at issue. The deduction of tax rules then apply to the funding bond issue. HMRC is required to accept funding bonds as payment for the tax deducted. The market value of the funding bond at the date of issue has to be established to determine the amount of tax paid, and any repayment due to non-taxpayers. The process of determining the tax paid is laborious, and the cost of ongoing administration is disproportionate, in relation to the tax at stake.

6.9 The Government invites views of proposes to amend the legislation in Chapter 12 of Part 15 of ITA so that the same rules (except for valuation) apply to funding bonds as apply to other forms of non-cash consideration. Tax on the funding bond would therefore be paid in cash.

6.10 In summary, the changes proposed in this chapter of this consultation are that:

• New rules would be introduced into Part 4 of ITTOIA to provide for the valuation of interest paid in vouchers or in kind, and for the tax deducted from the amount of the interest to be paid in cash.
• Chapter 12 of Part 15 of ITA would be amended so that tax to be deducted from the funding bonds is payable to HMRC in cash.

6.11 It is not anticipated that the changes will have any significant Exchequer effect, since interest in kind is already taxable; the changes merely clarify the correct statutory formula to be applied. Nor is it expected that such changes will pose an administrative burden to business.

6.12 Comments are invited on these proposed changes, in particular on the application of the grossing up rules, and on whether they would have any unforeseen or adverse impacts on individuals or businesses.

7. Disguised interest

7.1 The income tax rules on interest contain a number of provisions to counter tax avoidance. For example, the accrued income scheme (Part 12 of ITA), legislation in Chapters 8, 11 and 12 of Part 4 of ITTOIA (the rules on deeply discounted securities, transactions in deposits, and disposals of futures and options involving guaranteed returns), and section 378A of ITTOIA (offshore fund distributions), have their origins in measures to address arrangements that provide an interest-like return that would not otherwise be taxable as interest.

7.2 Income tax avoidance schemes continue to be developed that aim to secure an interest-like return that will be taxed, if at all, as something other than interest within the scope of Part 4 of ITTOIA. Examples of such schemes include highly structured products involving derivative contracts, warrants and other types of financial arrangement, ‘zero coupon bonds’, and ‘zero rate preference shares’.

7.3 An anti-avoidance rule addressing such ‘disguised interest’ for the purposes of the corporation tax rules on loan relationships was introduced in Finance Act 2009. Guidance on this legislation, which is now to be found at Chapter 2A of Part 6 of the Corporation Tax Act 2009 (‘CTA’), is set out in HMRC’s Corporate Finance Manual (www.hmrc.gov.uk/manuals/cfmmanual/CFM42000.htm) . Views are invited on the introduction of a disguised interest rule for income tax purposes, in Part 4 of ITTOIA, which would be modelled broadly on the corporation tax provisions.

7.4 Such a rule would address arrangements which produce a return that is economically equivalent to interest, and which would not be otherwise taxable as income. Like the equivalent corporation tax legislation, it would adopt a purposive approach, and would obviate the need for the piecemeal extension of existing anti-avoidance legislation relating to income tax on interest in response to new scheme disclosures. It would also facilitate a rationalisation of some existing rules, for example, the legislation on transactions in deposits, and on disposals of futures and options involving guaranteed returns.

7.5 In due course a disguised interest rule might also facilitate the simplification of the legislation on the accrued income scheme (which runs to 20 pages) and on deeply discounted securities (which runs to 14 pages). Such a simplification would be considered only after a disguised interest rule had been introduced and following further consultation.

7.6 A number of factors would need to be considered in the design of such a rule, including:

• exclusions needed to ensure that it did not bring into charge amounts that are currently covered by specific statutory exemptions;
• the potential overlap with other legislation under which amounts are taxed as if they are interest, such as the provisions in Part 10A of ITA on alternative finance arrangements;
• whether it should incorporate a purpose rule such as section 486C of CTA which applies for corporation tax.

7.7 Comments are invited on the principle of introducing a disguised interest rule for income tax, on the features that such a rule should incorporate if one were to be introduced, and on whether it would have any unforeseen or adverse impacts.

8. Taxes Impact Assessment

Summary of Impacts

Exchequer impact (£m)	2011-12	2012-13	2013-14	2014-15	2015-16
	Nil	Nil	200	200	200
	The Exchequer impact relates wholly to the possible withdrawal of the quoted Eurobond exemption for intra-group Eurobonds. This impact will be fully costed following responses to this consultation. The other proposals would have a negligible Exchequer impact.
Economic impact	The proposed changes will improve rules on the taxation of interest and interest-like returns, but will not have any wider economic impact.
Impact on individuals and households	The proposed changes will only impact those individuals and households who receive or pay interest which is covered by these proposals. The amount of additional administrative burden is thought to be negligible, and may represent a saving for certain taxpayers in that deduction of basic rate tax at source may remove the need for them to complete a self assessment tax return. Non-taxpayers will still be able to recover any tax deducted at source, or request that no tax is deducted from payments within the TDSI rules.
Equalities impacts	The proposed changes are not expected to have a disproportionate impact on any protected equality groups. The wider application of TDSI will mean that most of those with taxable income will pay the correct tax that is due at source.
Impact on businesses and Civil Society Organisations	The proposed changes will make it simpler for businesses to apply the rules on the taxation of, and deduction of tax from, interest. Although the changes would extend the application of certain existing requirements, this should not impose any new significant administrative burdens. Normal commercial transactions between businesses should be unaffected.
Impact on HMRC or other public sector delivery organisations	It is not anticipated that implementing this change will incur any significant additional costs or savings for HMRC or other public sector delivery organisations.
Other impacts	No other impacts are envisaged.

The Government would welcome comments or evidence to support the assessment of the impacts of the changes under consultation.

9. The Consultation Process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

This consultation is taking place during stages 1 and 2 of the process. The purpose of the consultation is to seek views on policy design and possible alternatives, before consulting later on specific legislative proposals.

How to respond

Responses should be sent by 22 June 2012:

• e-mail: tony.sadler@hmrc.gsi.gov.uk
• post: Tony Sadler, Room 3c03, 100 Parliament Street, London SW1A 2BQ
• fax: 020 7147 2641.

Telephone enquiries 020 7147 2608 (from a text phone prefix this number with 18001)

Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from the HMRC Internet site at http://www.hmrc.gov.uk/consultations/index.htm . All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.

HMRC will consider meeting interested parties to discuss the issues raised during this consultation. The timing, format and venue of these meetings will be informed by the expressions of interest received.

To help with the evaluation of responses it would be helpful if respondents could explain their interest in the subject and say whether they are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent. Responses will be acknowledged but it will not be possible to give substantive replies.

Next steps

A response document will be published. Responses will influence any legislative changes taken forward. If draft legislation follows, it is likely to be announced in autumn 2012 for inclusion in Finance Bill 2013.

Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentially can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs (HMRC).

HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

The Consultation Code of Practice

This consultation is being conducted in accordance with the Code of Practice on Consultation. A copy of the Code of Practice criteria and a contact for any comments on the consultation process can be found in Annex A.

Annex A: The Code of Practice on Consultation

About the consultation process

This consultation is being conducted in accordance with the Code of Practice on Consultation.

The consultation criteria

1. When to consult - Formal consultation should take place at a stage when there is scope to influence the policy outcome.

2. Duration of consultation exercises - Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible.

3. Clarity of scope and impact - Consultation documents should be clear about the consultation process, what is being proposed, the scope to influence and the expected costs and benefits of the proposals.

4. Accessibility of consultation exercise - Consultation exercises should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach.

5. The burden of consultation - Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained.

6. Responsiveness of consultation exercises - Consultation responses should be analysed carefully and clear feedback should be provided to participants following the consultation.

7. Capacity to consult - Officials running consultations should seek guidance in how to run an effective consultation exercise and share what they have learned from the experience.

If you feel that this consultation does not satisfy these criteria, or if you have any complaints or comments about the process, please contact:

Amy Burgess, Consultation Coordinator, Better Regulation and Policy Team, H M Revenue & Customs, Room 3E13, 100 Parliament Street, London, SWA 2BQ

020 7147 0096 or e-mail hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk

Annex B: Relevant Legislation

Income Tax (Trading and Other Income) Act 2005 - Part 4 Savings and Investment Income
Chapter 2	Taxation of interest
Chapter 8	Profits from deeply discounted securities
Chapter 11	Transactions in deposits
Chapter12	Disposals of futures and options involving guaranteed returns
Income Tax Act 2007
Part 12	Accrued income profits
Part 15	Deduction of income tax at source