Withholding Tax

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9 October 2023

UK domestic law requires companies making payments of UK sourced interest on loans capable of exceeding 1 year, to withhold tax at 20%, unless to a UK company.

post : Bookkeeping and Deadlines

What is Withholding Tax?

When a company pays interest, as outlined above, it must deduct income tax at the basic rate of 20% from the interest payments, known as Withholding Tax. In doing so, they act as a collector of tax.

A common example of the payment of interest by a company to an individual is where a director has made a loan to a company. A commercial rate of interest may be paid by the company as one way of extracting funds for the director. The interest is an allowable deduction for the company, provided the loan money is used within the company’s business, and not for an ‘unallowable purpose’.

Quarterly accounting

Companies must account for income tax on a quarterly basis, using a CT61 quarterly return, based on amounts paid and received in the particular quarter. The quarters are the same as the normal calendar quarters of the year, ie. 31 March, 30 June, 30 September and 31 December.

However, if a company’s year-end is different from any of these, there will be five return periods. For example, a company with a year ended 31 May will have the following return periods:

  • 1 June to 30 June
  • 1 July to 30 September
  • 1 October to 31 December
  • 1 January to 31 March
  • 1 April to 31 May

CT61s are not available to download from HMRC’s website, but can be requested online.

Implications of filing an incorrect CT61

If the tax is not paid by the due date or if an HMRC officer has reason to believe that an item has been omitted from a return, or that the return is otherwise incorrect, he may make an assessment to the best of his judgement to recover any tax underpaid. The tax at such an assessment is due within 14 days of the issue of the notice of assessment (see below regarding interest on unpaid tax).

Failure to file the tax returns or make the tax payments on time can lead to HMRC charging interest and penalties.

Interest on late paid tax

Where any income tax due under these provisions is not paid by the due date, interest is charged from the due date to the date when the tax is paid.

Interest on late paid tax is payable without deduction of tax and can be deducted in arriving at the company’s profits for corporation tax purposes.

Conclusion

It is important to understand the tax implications of interest payments and a company’s withholding tax filing and payment responsibilities.

The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.