Changes to withholding tax exemption for Eurobonds will not go ahead, says HMRC

Other proposed changes that will not go ahead include abolishing the difference between short and yearly interest and requiring tax to be paid in cash when funding bonds are issued. However, some changes will be made and these include an obligation for the issuer of a funding bond or PIK note to issue a certificate stating the value of the bond.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: "We welcome the Government's response to this consultation. They have recognised that the proposed changes would have imposed unnecessary burdens on business, and have decided not to proceed with the main elements of the proposals." She added that it is "a good result for UK Plc".

There is an exception from the duty to deduct or withhold tax when paying interest on a quoted Eurobond. The consultation proposed that this exception 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. As the responses to the consultation were largely against the proposed changes, the government has decided not to proceed with the change.

"The quoted Eurobond exemption is a simple and practical relief which is widely used in commercial transactions. Imposing conditions would have caused uncertainty and disruption in the markets", said Heather Self.

Funding bonds, sometimes known as PIK notes, are further loan notes issued instead of interest when the issuer of a loan note does not have the cash to pay the interest. They are frequently used in private equity transactions. Obligations to deduct tax from the interest are dealt with by handing over some of the funding bonds or PIK notes to HMRC. The consultation document had proposed that cash should be paid to HMRC in satisfaction of the withholding obligation.

The Government has confirmed that it will not proceed with this change but issuers of funding bonds will be obliged to issue a certificate of the value of the bond. Tom Cartwright, a tax expert at Pinsent Masons, commented that this could impose an additional compliance burden on issuers of PIK notes. 

Changes will be made to the law to confirm that where interest is paid in the form of goods or services, the interest should be treated as the retail or market price of those goods or services. Where a voucher is issued, the interest should be the face value of the voucher or, to cater for vouchers issued with no or almost no face value, the cash equivalent of the goods or services for which the voucher can be exchanged.

Where interest is paid by someone other than a bank or building society, there is a requirement on the payer to deduct tax when the interest is paid if the interest constitutes 'yearly interest' and no exception from withholding applies. Interest that is not 'yearly interest' is referred to as 'short interest'. The consultation document proposed that the distinction between 'yearly interest' and 'short interest' should be removed so that all interest would be subject to deduction of tax at source.

The summary of responses states that a number of responses to the consultation acknowledged that the terms ‘yearly’ and ‘short’ in relation to interest are now "somewhat arcane". However, as most respondents argued that the proposals did not represent an improvement over the current position, and favoured the retention of the concept of ‘yearly interest’, the government has decided not to proceed with this change.

However, the government does propose to change the law to make it clear that the requirement to deduct income tax from interest applies to compensation payments made to individuals, including payments made by banks as a result of financial mis-selling.