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Funding bonds are a way of settling an interest payment which mean that
the interest is deemed to be ‘paid’ without cash being paid over. Funding
bonds can be bonds, stocks, shares, securities or certificates of
indebtedness. When funding bonds have been used to settle an interest
payment then any withholding tax on the interest can also be settled by
handing a funding bond to HMRC. It is unclear whether, if the withholding
tax is then refunded, HMRC have to pay cash or could return the funding
bond.
HMRC can now repay tax claims using funding bonds where funding bonds were
used to pay the tax deducted. If only some of the tax is to be refunded then
HMRC can request that their bond is divided so that part of it can be handed
back.
Our view
Funding bonds are most commonly used when an interest payment needs to
be made but cash is not readily available, for example if connected
parties want to pay related party interest within twelve months of the
interest accruing in order to obtain a deduction under an accruals
basis. The main problem with funding bonds is that the amount of
interest or tax paid using them is deemed to be the market value of the
bond which can be different from its face value. This can lead to
problems in terms of how much interest and tax has been paid and
therefore should be repaid in a tax claim.
The repayment rules in relation to funding bonds were so unclear that
there used to be an argument that HMRC had to repay any tax in cash and
the company would be left with either shares or debt in the hands of
HMRC. The amendments clarify the repayment rules and are therefore
helpful to both sides. |
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