Interest penalty and tax return

talexuser

I can see the point being made. I would argue that if the t&c  penalty was fixed it would have nothing to do with interest, but if it is calculated from interest it is effectively linked or a part of interest. but I doubt that would have any legal standing, except as before to argue natural justice of paying tax on money never recieved. 

masonic

wmb194 said:

Deleted_User said:

wmb194 said:

talexuser said:

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

It's analogous to selling a corporate or government bond during its term. 

Not really...check https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 if you want to investigate this further.

I don't understand, you're going to have to spell it out for me. I'm really referring to the non-tax deductible commission for selling the bond being similar to the non-deductible fee for early closure.

I suspect they are misinterpreting the "interest is taxable when it arises" statement and drawing an inference that it is never taxable if it can never be withdrawn from the account in question. However, we both know this isn't correct because interest that is swallowed up in an account fee is still taxable. The fee is a separate issue and can be treated as coming from the account balance. If this were a capital gain under consideration, then a fee might come under allowable costs, but I don't believe there is any such provision for income.

I would agree with the OP that this isn't structured in a tax efficient manner, but it is what it is. Back in my P2P lending days, I found it infuriating when a platform would charge an explicit service fee, rather than reduce the interest rate to get their cut.

masonic

talexuser said:

I can see the point being made. I would argue that if the t&c  penalty was fixed it would have nothing to do with interest, but if it is calculated from interest it is effectively linked or a part of interest. but I doubt that would have any legal standing, except as before to argue natural justice of paying tax on money never recieved. 

Based on the wording you quoted, it is a fixed penalty (could be rephrased as X% on the amount withdrawn). If you held the account for less than 30 days, then you'd still pay the same monetary sum and get back less than you put in. It is not subject to you having accrued any interest.