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On appeal from: [2017] EWCA Civ 2124

This appeal considered whether statutory interest constitutes ‘yearly interest’ for the purposes of the Income Tax Act 2007, s 874(1).

The Supreme Court unanimously dismissed the appeal. The Court held that income tax must be deducted before payment of statutory interest to the creditors.

The Court considered that, historically, the income tax legislation adopted a dichotomy between the treatment of interest of any kind which is not paid out of profits or gains, on the one hand, and yearly interest, on the other hand. The mandatory deduction at source of yearly interest remains in place for interest paid by companies as well as certain other categories of taxpayers, and interest paid by any person to someone whose usual place of abode is outside the UK. The Court considered two relevant lines of case law. In drew an analogy to the second line, finding that interest payable on a surplus in an administration is of a special type. Such interest, once paid, compensates proving creditors for being kept out of their proved debts in respect of the period from the beginning of the administration until they are actually paid, but there is no liability to pay interest during the period in respect of which it is calculated, and the interest is not itself payable over a period of time. Therefore, on the present facts, the statutory interest payable is yearly interest.

For judgment, please download: [2019] UKSC 12
For Court’s Press Summary, please download: Court’s Press Summary
For a non-PDF version of the judgment, please visit: BAILII

To watch the hearing, please visit: Supreme Court Website (12 Feb 2019 morning session) (12 Feb 2019 afternoon session)