What does section 163 of the Income Tax Act 2007 do?

Section 163 modifies the exemption from the duty to deduct income tax at source for interest paid by banks on advances made before 29 April 1996. It replaces the detailed conditions in section 878(1) and (2) with a simpler rule exempting any bank carrying on a genuine banking business in the United Kingdom.

Which interest payments qualify for the simplified exemption under section 163?

Only interest payments relating to advances made before 29 April 1996 qualify for the simplified exemption under section 163. For these legacy lending arrangements, the bank need only demonstrate it carries on a genuine banking business in the UK, without satisfying the additional conditions normally required under section 878.

How does the section 163 exemption differ from the standard section 878 exemption?

The standard section 878 exemption requires banks to satisfy specific conditions in subsections (1) and (2) before being relieved of the duty to deduct income tax at source. Section 163 removes those detailed conditions for pre-29 April 1996 advances, providing a broader and simpler exemption based solely on conducting genuine banking business in the UK.

Does a bank need to meet any conditions to benefit from the section 163 exemption?

Yes, the bank must be carrying on a genuine banking business in the United Kingdom. However, it does not need to meet the more detailed conditions normally set out in section 878(1) and (2). This simplified requirement applies only to interest on advances made before 29 April 1996 as a transitional provision.

Income Tax Act 2007 section 163

Deduction from certain payments of yearly interest: interest paid by banks

Section 163 modifies the rules on when banks must deduct income tax from interest payments, specifically for interest on advances made before 29 April 1996.

For interest on advances made before 29 April 1996, a simplified exemption from the duty to deduct income tax at source applies.
The normal conditions in section 878(1) and (2) are replaced with a broader exemption for banks carrying on genuine banking business in the UK.
Under the modified rule, any bank conducting a genuine banking business in the UK is exempt from the duty to deduct income tax under section 874 when paying interest on these older advances.
This transitional provision preserves a simpler regime for legacy lending arrangements predating 29 April 1996.

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