Interest reported to HMRC in wrong year

Annemos

Kim_13 said:

Nationwide getting into the habit of releasing competitive 18 month fixed bonds in May has me thinking that they must be aware of the issue. Their timing means it is all in one year and the issue doesn’t arise; I suspect most incorrectly taxed savers who realise there is a problem first complain to the bank because they are easier to get hold of than HMRC.  

Kim-13. I was looking at Bonds back in July, because our Mum passed away and left me some. I was maxed out on my own ISA.  With Barclays there was no option at all to get a regular Bond for more than one-year. I wonder if they are also aware of the problem. 

kinger101

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Looking at current Paragon 5 year fixed term accounts - 

"10. Your interest can be paid into your Fixed Rate Savings Account, to another account you hold with Paragon (subject to the Product Terms andConditions of that account), or to the nominated bank account you have set up. We do not pay interest into your nominated bank account ifit is less than £1. Instead, the amount will be accrued on your account and we will pay it once the cumulative interest you have earned is more

than £1."

Implies to me only the capital and not the interest is locked.

masonic

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

kinger101

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....

The treatment of the interest and not the capital is the important part.

So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

wmb194

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....

The treatment of the interest and not the capital is the important part.

If the interest has been credited to the account and is inaccessible then it arises for tax at the end of the term.

masonic

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....
The treatment of the interest and not the capital is the important part.
So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

The only thing that matters is what was agreed at the conclusion of the contract. If the agreement was that the contents of the account would be inaccessible and interest would be credited to the account, whether or not an alternative agreement could have been made, the interest does not arise until maturity.

kinger101

masonic said:

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....
The treatment of the interest and not the capital is the important part.
So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

The only thing that matters is what was agreed at the conclusion of the contract. If the agreement was that the contents of the account would be inaccessible and interest would be credited to the account, whether or not an alternative agreement could have been made, the interest does not arise until maturity.

I'm not so sure.

My interpretation would be that this would be the case only if roll-up into the fixed term inaccessible account was compulsory.  Otherwise, the interest was available to the OP in the tax year credited.  

Entitlement is the deciding factor,not behaviour.

In my experience, there is usually also an option to change nominated accounts.

masonic

kinger101 said:

masonic said:

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....
The treatment of the interest and not the capital is the important part.
So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

The only thing that matters is what was agreed at the conclusion of the contract. If the agreement was that the contents of the account would be inaccessible and interest would be credited to the account, whether or not an alternative agreement could have been made, the interest does not arise until maturity.

I'm not so sure.
My interpretation would be that this would be the case only if roll-up into the fixed term inaccessible account was compulsory.  Otherwise, the interest was available to the OP in the tax year credited.  
Entitlement is the deciding factor,not behaviour.

It is common for banks and building societies to offer a variety of options from which the customer applies for the one they want, and the financial institution either accepts or rejects their application for that specific product. The existence of some options that permit access does not negate the inaccessibility of other options. That way madness lies. The customer either can or cannot move the interest out of their account, and this can easily be tested once the 14 day cooling off period has expired.

A fixed term savings account consists of a binding contract between the customer and the financial institution. If that contract gives the customer no right to move their interest out of the account to which it is credited, then it is inaccessible and does not arise for tax until maturity. It does not matter if the customer could have opted for a different version of the account that pays interest externally, or one which allows withdrawals. They picked what they picked and entered into a binding contract on that basis. Said binding contract is the basis for the accessibility test and what HMRC will ask for in evidence where there has been a mistake in taxation.

This is the answer that was (eventually) extracted from HMRC in their now closed help forum, and why in a few threads posters have reported being asked for the contractual terms by HMRC when they have challenged a tax calculation.

In any case, JN Bank does not offer accounts where interest can be paid away, so even if you remain unsure of the Paragon account (where they offer a pay-away version), this one has clearly been treated incorrectly by HMRC.

Kim_13

kinger101 said:

masonic said:

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....
The treatment of the interest and not the capital is the important part.
So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

The only thing that matters is what was agreed at the conclusion of the contract. If the agreement was that the contents of the account would be inaccessible and interest would be credited to the account, whether or not an alternative agreement could have been made, the interest does not arise until maturity.

I'm not so sure.

My interpretation would be that this would be the case only if roll-up into the fixed term inaccessible account was compulsory.  Otherwise, the interest was available to the OP in the tax year credited.  

Entitlement is the deciding factor,not behaviour.

This was my understanding, and is the same principle as interest being deemed to be accessible even if you have to pay a penalty to access it during the term (the need to give notice would be more common nowadays.) That you chose not to do something doesn't alter the fact that the option was/is available. HMRC would surely argue that if the saver didn't have the means to pay the tax without access to the funds then they would have utilised the pay away option or chosen a different account. 

masonic

Kim_13 said:

kinger101 said:

masonic said:

kinger101 said:

masonic said:

kinger101 said:

MinstrelWelly said:

kinger101 said:

MinstrelWelly said:

Thanks for your responses.

By 'due' I meant when the tax is due. Interest is paid each year, but that interest is taxable at the end of term (so all interest is taxable in the tax year of end-of-term)

With regard to the Gov.uk manual, and 'Example 2'. Yes, I've checked that out. I don't have access to the money until end-of-term, even with a penalty. Tax is definitely due on all the interest at end of term.

I've been reading the Gov.uk instructions to banks on reporting interest earned via the "Bank And Building Society Interest Returns". I'm a newby so can't post links, but if you google the quoted return name, it'll be the first option.

The instructions just say that banks must annually report interest paid. There is no mention of reporting interest in the year when tax on it is due. The spreadsheet only has one column for tax year (so you can't separately identify the year interest was credited and year interest is taxable), and the instructions say you only need to fill the year column in for one row, so the implication is that all entries will be for the same tax year.

So, my take is that the banks are following the instructions, in reporting the interest credited each year (in the tax year that its credited). Meanwhile, HMRC are treating it as taxable in the year reported (which is the year in which the interest is credited, but not the year its taxable!)

Or put it another way. HMRC are assuming that banks will report interest in the year that it is taxable, even though they haven't told the banks to do that via their instructions.

As explained, if the account can be accessed, it is taxable in the year it is received.

The bank and HMRC have likely applied the correct treatment.

No, they haven't. The banks report interest in the year its credited, because that's what they've been tasked with doing. That report doesn't indicate when the interest is taxable, so for simple assessment, HMRC assume its taxable in the year reported.

Did you read the "if"?

Paragon and JN Bank prohibit early access to their fixed term accounts, so HMRC has not applied the correct treatment in this case.

In general, if you shop around for the best rates, you are unlikely to encounter a fix that permits early access as this is associated with a lower interest rate due to the less restrictive nature of the account. It tends to be the high street banks that offer such accounts as "fixed term", whereas others market them as "limited access" accounts.

See my comment above....
The treatment of the interest and not the capital is the important part.
So OP needs to clarify whether the interest can only be paid into the base account, or whether their is the facility to have it paid into another accessible account.

The only thing that matters is what was agreed at the conclusion of the contract. If the agreement was that the contents of the account would be inaccessible and interest would be credited to the account, whether or not an alternative agreement could have been made, the interest does not arise until maturity.

I'm not so sure.

My interpretation would be that this would be the case only if roll-up into the fixed term inaccessible account was compulsory.  Otherwise, the interest was available to the OP in the tax year credited.  

Entitlement is the deciding factor,not behaviour.

This was my understanding, and is the same principle as interest being deemed to be accessible even if you have to pay a penalty to access it during the term (the need to give notice would be more common nowadays.) That you chose not to do something doesn't alter the fact that the option was/is available. HMRC would surely argue that if the saver didn't have the means to pay the tax without access to the funds then they would have utilised the pay away option or chosen a different account. 

I once thought that too. But, following it to its logical conclusion, no credited interest could be treated as being taxable only at maturity, because accounts that permit access exist and if the saver didn't have the means to pay the tax without access to the funds then they would have chosen one of these other available accounts. Yet the legislation and case law contradicts that, as does HMRC.

What is really bizarre is that the situation existed even prior to the abolition of deduction at source, presumably for the benefit of higher rate taxpayers.