What does section 888 of the Income Tax Act 2007 do?

Section 888 exempts statutory interest arising under the Late Payment of Commercial Debts (Interest) Act 1998 from the income tax deduction at source rules. It removes the normal duty under section 874 to withhold income tax from payments of yearly interest when the interest in question is statutory interest on late-paid commercial debts.

Why is statutory interest on late commercial debts exempt from withholding tax?

HMRC confirmed in Tax Bulletin 42 (August 1999) that statutory interest on late-paid commercial debts is not yearly interest. Because it falls outside the scope of yearly interest, the deduction at source rules do not apply. Section 888 places this long-standing HMRC practice on a clear statutory footing within United Kingdom law.

Does a business need to deduct income tax when paying statutory interest to a supplier?

No. When a business pays statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998, it should pay the full amount without deducting any income tax. The recipient accounts for the interest as taxable income through their own tax return, but the payer has no withholding obligation.

How does the statutory interest exemption work in practice?

If a buyer pays a commercial debt late, statutory interest accrues automatically under the 1998 Act. When the buyer settles the debt and accrued interest, it pays the interest in full with no tax deducted. The supplier includes the statutory interest received as taxable income in its own tax computations.

Income Tax Act 2007 section 888

Statutory interest

Section 888 provides an exemption from the duty to deduct income tax at source when paying statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998.

Statutory interest arising under the Late Payment of Commercial Debts (Interest) Act 1998 is exempt from the income tax deduction at source rules.
The normal duty under section 874 to deduct income tax from payments of yearly interest does not apply to this type of interest.
This exemption reflects HMRC's long-standing view, published in Tax Bulletin 42 (August 1999), that statutory interest on late-paid commercial debts is not yearly interest.
The payer of statutory interest should therefore pay the full amount without withholding any income tax.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member