Was statutory interest paid to creditors in insolvency proceedings ‘yearly interest’ which, if it were, would be subject to a deduction of basic rate income tax?
Following the administration of Lehman Brothers International (Europe), there is a substantial surplus in the administration (presently estimated to be between £6.6 billion and £7.8 billion). Some of this surplus will be used to pay statutory interest to creditors under the insolvency rules. Statutory interest arises once creditors have received payment in full of their debts at the outset of the insolvency procedure (administration in this case) and is an additional amount payable out of any remaining surplus as interest on the creditor debts in respect of the periods during which they have been outstanding since the start of the insolvency procedure. This decision concerns whether this statutory interest, when paid, is 'yearly interest' for tax purposes. If so, the Joint Administrators will be required to deduct basic rate income tax from the payments made. If it is not ‘yearly interest’ then there is no requirement to deduct income tax from such payments.
The Joint Administrators submitted that the statutory interest is not of the nature of ‘yearly interest’, in summary, for the following reasons:
HMRC contended that:
A summary of the key observations made by the Judge, the honourable Mr Justice Hildyard, in considering the decision is as follows:
In summary the judge concluded that the unique nature of statutory interest, in particular a lack of investment character or recurrence, means that is not ‘yearly interest’ for tax purposes and no obligation to deduct tax arises.
In the final paragraphs of his decision, the judge also criticised HMRC for initially confirming that the interest could be paid without deduction of interest, and then reversing this position, stating, “It is of real importance, both in terms of good governance and a fair market, that HMRC should make every effort to ensure that this sort of thing does not happen again.”
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