天美影院

The definition of interest has been the subject of much judicial interpretation over the years. In Westminster Bank Ltd v. Riches (28TC159), Lord Wright observed

鈥溾��the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or, conversely the loss he suffered because he had not had that use. The general idea is that he is entitled to compensation for the deprivation.鈥�

The leading case on the meaning of 鈥榠nterest of money鈥� is now Re Euro Ltd Hotel (Belgravia) Ltd (51TC293). In that case, Megarry J considered that in general the case-law showed there were two requirements which had to be satisfied for a payment to amount to interest

• there must be a sum of money by reference to which the payment which is said to be interest is to be ascertained - a payment cannot be 鈥榠nterest of money鈥� unless there is the requisite 鈥榤oney鈥� for the payment to be said to be 鈥榠nterest of鈥�;
• those sums of money must be due to the person entitled to the alleged interest.

He did not suggest that the two requirements are exhaustive or inescapable but that in the ordinary case they sufficed.

What is interest is a question of substance

What constitutes interest is a question of legal substance, not terminology. In the Westminster Bank case Lord Wright said its 鈥榚ssential quality鈥�depends on substance not on the mere name鈥�. Lord Simonds, with Lord Porter concurring, said that what needed to be considered was 鈥榳hat is its intrinsic character鈥�.

That substantive test was reaffirmed in Re Euro Hotel (Belgravia) Ltd, in which by Megarry J said

鈥淚t has, quite rightly, not been suggested that the language used by the parties to an instrument in describing payments to be made under it can bind the Inland Revenue, or affect the operation of a statute. The question must always be one of the true nature of the payment.鈥�

The contract in that case was one in which it was provided that one party would 鈥榩ay to the Bank interest鈥�. It was held that what was paid was not 鈥榠nterest of money鈥� despite the wording of the contract quoted above, because the Bank in question had not advanced money as a loan, but instead as out and out non-returnable payments for building works. The 鈥榠nterest鈥� was not 鈥榠nterest of money鈥�.

鈥楽ingle indivisible sums鈥�

Another important case on the nature of interest is Chevron Petroleum (UK) Ltd, & Others v. BP Petroleum Development Ltd & Others Ltd (57TC137). Payments between the companies included 鈥榓n interest factor鈥� and were calculated in accordance with a complex formula. BP made the payments to Chevron after deducting income tax from the interest factors. The point at issue was whether the payments were true interest. Lord Justice Megarry鈥檚 view was that the 鈥榠nterest factor鈥� was, in law, 鈥榠nterest of money鈥� and that because of the substantive nature of the test the Court would, if necessary, dissect lump-sum payments into interest of money and other sums. He said

鈥淚f in its nature a sum is 鈥榠nterest of money鈥�, I think it retains that nature even if the parties to a contract provide for it to be wrapped up with some other sum and the whole paid in the form of a single indivisible sum. The wrappings may conceal the nature of the contents but they do not alter them. Were the law otherwise, strong contractual wrappings might become remarkably popular.鈥�

Negative interest

A sum paid by a creditor to a debtor, often referred to as 鈥榥egative interest鈥�, is not in fact interest. It does not meet the definitions of interest, in particular it is not 鈥榩ayment by time for the use of money鈥�. It is akin to a fee paid to the debtor to hold the creditor鈥檚 money.

Negative interest cannot be set-off against interest arising. So, if 拢300 of interest arose to an individual in a year in which they also paid 拢100 in 鈥榥egative interest鈥� the amount potentially subject to tax would be the full 拢300.