Introduction Background
13.This legislation follows consultation in 2012 on a number of possible changes to income tax rules on interest and on deduction of income tax from interest.
14.The application of the current rules on deducting income tax from interest can be unclear and inconsistent in certain situations. For example, tax is required to be deducted from interest on compensation payments if it is ‘yearly interest’, but not if it is ‘short interest’; and, even if it is yearly interest, no tax is required to be deducted if the institution paying it is a building society or a bank paying it in the ordinary course of its business. A common example of interest paid on such compensation is that paid by financial institutions in cases of financial mis-selling.
15.Similarly, the amount of tax to be deducted when any interest is paid in kind can be difficult to ascertain in the absence of a clear rule providing how the interest is to be valued.
16.The changes clarify the application of the legislation and ensure that the rules on deduction of income tax operate in a consistent manner.