Interest reported to HMRC in wrong year

fuzzzzy

masonic said:

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.

I recently asked HMRC about the case of multi year accounts where you have the option of changing where the money is paid out to throughout the term (in my experience most fixed rate accounts have this facility to change the option either online or by telephone). I was half expecting to be told that any interest you choose to have compounded would not be deemed accessible until the end of term, however I was told 

 "If you have the option to have the interest paid out then it will be taxable each year even if you choose to have it
 compounded." 

Of course I can't be sure another HMRC call handler would tell me something else, but that is what I have been told so that is how I am applying the rule.

I do agree with you on the likes of JN Bank though, where the only option is to compound.

masonic

fuzzzzy said:

masonic said:

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.

I recently asked HMRC about the case of multi year accounts where you have the option of changing where the money is paid out to throughout the term (in my experience most fixed rate accounts have this facility to change the option either online or by telephone). I was half expecting to be told that any interest you choose to have compounded would not be deemed accessible until the end of term, however I was told 

 "If you have the option to have the interest paid out then it will be taxable each year even if you choose to have it compounded." 

Of course I can't be sure another HMRC call handler would tell me something else, but that is what I have been told so that is how I am applying the rule.

I do agree with you on the likes of JN Bank though,  where the only option is to compound.

I've not come across any accounts that allow you to switch from compounding to pay away after conclusion of the agreement, though I know they do exist. However, that would different to agreeing up front to a binding option. Edit: It does appear that Paragon does offer these accounts: https://www.paragonbank.co.uk/personal/personal-faqs/savings-questions/interest (How do I change my interest instructions)

This was one scenario that was discussed in the HMRC forum with contradictory responses, so if you can at any time opt to have the interest paid away, it does make for a grey area.

fuzzzzy

masonic said:

fuzzzzy said:

masonic said:

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.

I recently asked HMRC about the case of multi year accounts where you have the option of changing where the money is paid out to throughout the term (in my experience most fixed rate accounts have this facility to change the option either online or by telephone). I was half expecting to be told that any interest you choose to have compounded would not be deemed accessible until the end of term, however I was told 

 "If you have the option to have the interest paid out then it will be taxable each year even if you choose to have it compounded." 

Of course I can't be sure another HMRC call handler would tell me something else, but that is what I have been told so that is how I am applying the rule.

I do agree with you on the likes of JN Bank though,  where the only option is to compound.

I've not come across any accounts that allow you to switch from compounding to pay away after conclusion of the agreement, though I know they do exist. However, that would different to agreeing up front to a binding option, like in the Paragon case.

This was one scenario that was discussed in the HMRC forum with contradictory responses, so if you can at any time opt to have the interest paid away, it does make for a grey area.

Secure Trust, UTB, RCI, Gatehouse, Charter, Ford I think all offer this facility.

kinger101

OP is only after the answer they want to hear though. The first response in the thread asked the pertinent question.

masonic

fuzzzzy said:

masonic said:

fuzzzzy said:

masonic said:

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.

I recently asked HMRC about the case of multi year accounts where you have the option of changing where the money is paid out to throughout the term (in my experience most fixed rate accounts have this facility to change the option either online or by telephone). I was half expecting to be told that any interest you choose to have compounded would not be deemed accessible until the end of term, however I was told 

 "If you have the option to have the interest paid out then it will be taxable each year even if you choose to have it compounded." 

Of course I can't be sure another HMRC call handler would tell me something else, but that is what I have been told so that is how I am applying the rule.

I do agree with you on the likes of JN Bank though,  where the only option is to compound.

I've not come across any accounts that allow you to switch from compounding to pay away after conclusion of the agreement, though I know they do exist. However, that would different to agreeing up front to a binding option, like in the Paragon case.

This was one scenario that was discussed in the HMRC forum with contradictory responses, so if you can at any time opt to have the interest paid away, it does make for a grey area.

Secure Trust, UTB, RCI, Gatehouse, Charter, Ford I think all offer this facility.

Ah yes, I see that in the T&C for Secure Trust. I hold one of these accounts but opened it since I got wise to interest arising, so set it up to pay away from the outset.

Gatehouse is the other I have used, but it appears at least some of their accounts do not give the option to pay away. They don't have any current offerings with the option that I can see.

masonic

kinger101 said:

OP is only after the answer they want to hear though. The first response in the thread asked the pertinent question.

The first response requires "was" to be changed to "is" for it to be pertinent, and even then it only moves the OP's answer from certain to equivocal.

I hadn't appreciated the number of accounts that do permit the interest instruction to be changed at any time, making the test I suggested in an earlier posts ever more relevant:

masonic said:

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.

fuzzzzy

masonic said:

fuzzzzy said:

masonic said:

fuzzzzy said:

masonic said:

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.

I recently asked HMRC about the case of multi year accounts where you have the option of changing where the money is paid out to throughout the term (in my experience most fixed rate accounts have this facility to change the option either online or by telephone). I was half expecting to be told that any interest you choose to have compounded would not be deemed accessible until the end of term, however I was told 

 "If you have the option to have the interest paid out then it will be taxable each year even if you choose to have it compounded." 

Of course I can't be sure another HMRC call handler would tell me something else, but that is what I have been told so that is how I am applying the rule.

I do agree with you on the likes of JN Bank though,  where the only option is to compound.

I've not come across any accounts that allow you to switch from compounding to pay away after conclusion of the agreement, though I know they do exist. However, that would different to agreeing up front to a binding option, like in the Paragon case.

This was one scenario that was discussed in the HMRC forum with contradictory responses, so if you can at any time opt to have the interest paid away, it does make for a grey area.

Secure Trust, UTB, RCI, Gatehouse, Charter, Ford I think all offer this facility.

Ah yes, I see that in the T&C for Secure Trust. I hold one of these accounts but opened it since I got wise to interest arising, so set it up to pay away from the outset.

Gatehouse is the other I have used, but it appears at least some of their accounts do not give the option to pay away. They don't have any current offerings with the option that I can see.

I have a Gatehouse 5 year account that matures in 2027 and that definitely lets me change interest payouts at any time online between annual or monthly and between compounding to the account or paying out to a nominated account. I usually always ring the provider before taking out any multi year fix to check the particular rules on interest payments. Secure Trust and UTB do not let you make changes online but you can phone them up to ask for the interest payout instruction to be changed each year.

Paragon is an odd one. At the moment on moneyfacts they are offering 2 versions of a 2 year fix - one where interest compounds annually and pays out at maturity and one where interest pays out annually. I would have thought that it was safe to assume that if you choose the one that compounds annually then your interest would not be deemed accessible until maturity, presuming the T&Cs of that particular account do not allow you to then change your interest instructions during term.

masonic

Following @fuzzzzy 's revelation, I did an audit of the accounts I have held and it looks like I am in the clear regarding any ambiguous declarations.

For Atom, Gatehouse, HEBS and Secure Trust, I set them all up as pay away and declared interest when paid out.

For BLME interest must be paid away

For DF Capital, they credited all interest at maturity

For Zopa and Nationwide, interest must be compounded for the accounts I held

Regarding Gatehouse, I have some old T&Cs that state only this regarding profit being paid:

The terms themselves do not mention anything about having the ability to change this. So perhaps they will in practice, but my agreement would imply it is fixed at application.