Revenue clarifies funding bond issue

HMRC have published the draft legislation on a proposed minor legislative change to clarify the way that repayment claims for tax, paid by funding bond are satisfied.

They say that this may be of particular interest to people in the insolvency industry.

The relevant legislation on funding bonds is in TA 1988, s 582, ITTOIA 2005, s 380 and ITA 2007, ss 939 and 940. It applies when a debtor company pays a creditor interest, not in money but by the issue of a funding bond.

A funding bond is a bond, stock, share or security or other certificate of indebtedness.

The issue of the funding bonds is treated as if it were a payment of interest equivalent to the value of the funding bond at the date of issue.

As a consequence, if the debtor company would be obliged to deduct tax from the interest if it were paid in money it is similarly obliged to deduct tax when the interest is paid by funding bond.

The tax is deducted by the debtor company retaining the relevant percentage of the funding bond (currently 20%).

Sometimes the income tax deducted from the interest paid by funding bond is repayable. For example the creditor may be non-taxpayer, such as a charity.

The problem is that the funding bond legislation does not specifically refer to repayment claims for tax deducted from interest paid by funding bond or how such claims are to be satisfied.

Historically, where appropriate, the funding bond(s) held by HMRC have been used to satisfy such repayment claims and it is to clarify this position that the following legislative change is proposed.

The draft legislation would enable HMRC to satisfy repayment claims for tax paid by funding bond by transferring to the claimant all or part of the funding bond representing the tax.

The creditor will then hold funding bonds representing the total amount of interest paid by the debtor company subject to any residual taxing rights in the relevant double taxation agreement.

Any comments should be sent by 12 March 2008 to Lesley Hamilton: lesley.hamilton@hmrc.gsi.gov.uk or 020 7147 2564.

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