When Companies Pay Interest on a Loan from Individuals in the UK, Withholding Tax Deduction and CT61: An Overview for UK resident taxpayer

As a business owner or investor, it is important to understand the tax implications of receiving interest payments from companies. This article will provide an overview of the rules and processes involved in receiving interest from companies. We also discuss how to obtain the necessary CT61 forms and information from HMRC.

Can the Company pay interest if I Lend Money to the Company?

If you lend money to your company, you may be able to charge interest on the loan. This interest is taxable as income in the same way as interest received from a company. However, certain rules and limits apply to the amount of interest you can charge.

According to HMRC, the interest you can charge must be “reasonable.” This means it should be based on the prevailing market rate for loans of a similar amount and duration. The excess may be treated as a tax-free loan or distribution if you charge more than the reasonable interest rate. However, if you are a director or shareholder of the company, the rules for charging interest on loans may differ. It is always a good idea to consult with a tax professional or seek guidance from HMRC. This will ensure that you comply with the relevant rules and regulations. At Jack Ross, we can help you ensure you stay within the rules.

What is Withholding Tax Deduction Charge?

When a company pays interest to an individual in the UK, it must deduct income tax at the basic rate of 20% from the interest payments. This is known as “withholding tax.” The company, at this point, is responsible for collecting this tax and paying it to HM Revenue & Customs (HMRC). Then, the tax is deducted at a rate of 20%.

How an individual can Obtain a Certificate of Tax Deducted (Form R185)

Taxpayers who have received interest from a company and tax has been withheld, may be entitled to a tax credit. At this point you will need to claim the tax credit. You will need to obtain a certificate of tax deducted (form R185) from the company that paid the interest. The form R185 will show the amount of interest paid and the amount of tax withheld. You can use this form to claim a tax credit on your personal tax return. If you do not receive a form R185 from the company, you can request one by contacting the company and providing your name and contact information. You can download the form from this link.

Filing Deadlines for Form CT61

The fiscal year is partitioned into various instalments for reporting yearly payments, interest, and alternative fund payments. Instalments typically cover a three-month span and finish on the last day of March, June, September, and December. Most companies’ accounting periods end on one of these quarterly dates. As a result, they are divided into four equivalent segments of three months each.

For example, if an accounting period is for 12 months ending 30 June, the return periods are:

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

However, if a company’s accounting period does not end on one of the quarter dates, a three-month period is split into two return periods. Therefore, if an accounting period is for 12 months ending 20 May, the return periods are:

  • 21 May to 30 June
  • 1 July to 30 September
  • 1 October to 31 December
  • 1 January to 31 March
  • 1 April to 20 May.  

Obtaining a Form CT61 for tax deducted at a rate of 20% on interest payments

The company can request a form CT61 from this HMRC link. Or as your tax agent we can request it from HMRC. If you are an LLP you must send a letter and clearly state that you are a LLP and quote your Unique Taxpayer reference with details of the payment made and the tax deducted to:

Self Assessment

HM Revenue and Customs

BX9 1AS

Claiming a Tax Credit for Withholding Tax

To claim a tax credit for withheld tax, you must complete a personal tax return. Additionally, you must include the amount of interest received and the tax withheld on the form. If your total tax bill for the year is less than the tax withheld on the interest, you will be entitled to a tax refund for the difference. To claim the refund, you must complete a personal tax return and include the amount of tax withheld on the form. You will also need to attach a copy of the form R185 showing the amount of interest paid and the amount of tax withheld.

The Law when companies pay interest and CT61

The law governing CT61 Returns can be found in Part 15, Chapter 15 of the Income Tax Act 2007 (ITA). This law applies to companies that are either a body corporate, an unincorporated association, a UK-authorized unit trust or open-ended investment company, or a building society, local authority, or deposit-taker. However, it does not apply to partnerships. CT61 Returns cover annual payments, interest, and alternative finance payments made by companies. Part 15, Chapters 2 and 4 of the ITA covers interest and alternative finance payments made by building societies. Interest and alternative finance payments made by banks and other deposit-takers are covered by Section 851 of the ITA. Banks are defined in Section 991 of the ITA, and deposit-takers are defined in Section 853 of the ITA.

Certain payments may be made without withholding tax under Part 15, Chapter 11 of the ITA. CT61 Returns may also be used for payments of relevant distributions by a company or the principal company of a group within Part 12 of the Companies Act 2010 (CTA 2010). Relevant distributions, as defined in The Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006, include manufactured dividends representative of a dividend falling within Section 785(1)(a) or (b) of the CTA 2010.

Q&A

Q: Can I claim a tax credit for withheld tax if I am a non-resident of the UK?

A: Yes, you can claim a tax credit for withheld tax if you are a non-resident of the UK. However, you will need to complete a non-resident tax return and include the amount of interest received and the tax withheld on the form. If your total tax bill for the year is less than the tax withheld on the interest, you will be entitled to a tax refund for the difference.

Conclusion

Receiving company interest can be a useful source of income for business owners and investors in the UK. And the interest payable by the company is a deduction for corporation tax. However, it is important to understand the tax implications of these payments, including the requirement for withholding tax (tax at source) and the need to file a form CT61 with HMRC. By following the rules and processes outlined in this article, you can ensure that you correctly report and pay the necessary taxes on your interest income. If you have any additional questions or need help navigating the process of receiving interest from companies, don’t hesitate to reach out to us. Our tax experts help you understand your obligations and ensure that you comply with UK tax laws. Complete the form below, and we will be in touch.