Introduction Interest payable on compensation
2.Paragraph 1 of the schedule provides for Chapter 3 of Part 15 of the Income Tax Act 2007 (ITA 2007) to be amended. Chapter 3 sets out the tax rules on deducting income tax from payments of ‘yearly interest’. The meaning of ‘yearly interest’ is derived from case law and refers, broadly, to interest on a debt where the debtor and creditor intend that the debt should exist for more than a year, or where it is mutually accepted that the interest may be paid from year to year.
3.Paragraph 2 amends section 874 of ITA 2007 by inserting new subsections (5A) and (5B). The new subsections provide that interest that is payable to an individual in respect of compensation is to be treated as a payment of yearly interest. As a consequence, the person paying the interest will be required to deduct income tax at source from it. This is subject to a regulation-making power to allow for this requirement not to apply in certain circumstances.
4.Paragraphs 3 and 4 amend sections 875 and 878 of ITA 2007, to disapply the exception from the duty to deduct income tax from yearly interest that currently applies to building societies and banks Building societies and banks will therefore have to deduct income tax from interest payable in respect of compensation, where previously they would have been able to reply on the relevant exception.