The current tests in UK law of whether, for the purposes of deduction of tax, payment of interest is made from a UK source are unclear and cause confusion. The statutory rules date back a long way and do not take account of modern financial practice. They have been subject to judicial interpretation, which has not always been easy to apply in practice.
The EU Interest & Royalties Directive includes a definition of where interest arises. This will be introduced in to UK law as part of implementing the Directive, but will apply only to payments of interest that are covered by the Directive. This new definition throws into relief the problems with the current approach to the question of UK source for the purposes of deducting tax from interest payments.
The Government would like to consult on the proposal to apply such a definition more widely than the circumstances covered by the directive. It wants to find out whether adopting a residence based definition and extending it to annuities and other annual payments would cause any difficulties for business or other payers.
