Revenue Note for Guidance

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Revenue Note for Guidance

255 Arrangements for payment of interest less tax or of fixed net amount

This section deals with the construction of agreements made at a time when tax was deductible from interest at source. In such cases it was customary to provide for payment of interest “less tax” or at a net rate after deduction of tax. Since tax is no longer deductible from such payments it is necessary to provide that such agreements, where they might still be in existence, are to be construed as meaning payment of interest at the gross rate of interest.

(1) Where there is any agreement, however worded, for payment of an amount less tax, the words “less tax” or the equivalent are to be disregarded in the case of interest from which tax may not now be deducted. If, therefore, there is an existing agreement to pay interest of, say, €1,000 a year less tax, this would have meant that for years for which the standard rate of tax was 35 per cent the borrower would pay a net sum of €650 to the lender (in whose hands the interest would be regarded as taxed income). Since 1974–75 the borrower is under an obligation to pay €1,000 a year to the lender, who is charged to tax directly.

(2) An agreement, however worded, for the payment of interest chargeable with tax under Schedule D by reference to a net rate after deduction of tax is construed as requiring payment at the corresponding gross rate. For example, an agreement to pay such amount of interest as after deduction of tax amounts to, €800 per annum is, when the standard rate is 20 per cent, required to be construed as an agreement to pay a gross amount of €1,000.

Relevant Date: Finance Act 2021