Certain types of interest and other payments made by UK companies are required to be paid net of income tax, with the tax deducted payable to HM Revenue & Customs (HMRC) and reported using a CT61 quarterly return. This is in contrast to the position with banks and building societies where, since April 2016, interest has been paid gross.
We have recently encountered a few instances where the requirement to pay interest net and prepare quarterly returns to HMRC has been overlooked so thought it would be useful to revisit this area.
The most common type of payment where companies must deduct income tax is that of yearly interest. Other payments required to be paid ‘net’ by a company include royalties or any similar annual recurring payments.
Yearly interest refers to interest on loans which are capable of lasting more than 12 months. As such, income tax is generally not required to be deducted from interest on short term loans lasting less than 12 months.
The main instances where a company will be required to deduct income tax at source from payments of yearly interest include:
- Interest paid to individuals;
- Interest paid to overseas companies;
- Interest paid to partnerships.
Tax is deducted by the company from the relevant payment at the basic rate of income tax at the time the payment is made, currently 20%. The company must then account for the income tax on a quarterly basis, using a CT61 quarterly return, based on amounts paid and received in that particular quarter. The quarter ends for the CT61 returns are 31 March, 30 June, 30 September and 31 December. However, if the company’s year end is not one of the quarter end dates, the company’s year end will also be deemed to be a quarter end, and the company will have five return periods for its accounting year.
For each CT61 quarter the tax withheld from payments can be offset by any income tax suffered on receipts. The CT61 and the net tax payable are due 14 days after the end of the return period. Interest is chargeable from the due date for any late payment of the tax.
The recipient of the ‘net’ payment will then usually be able to claim relief against their tax liability for this tax suffered at source.
The above is only an outline of the requirements surrounding interest and other annual payments made by companies. If you would like further information in connection with interest and other ‘annual’ payments made by companies or would like assistance with completing a CT61, please contact our Tax Director, Jenny Marks.
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