Where the client is not liable to tax or is not ordinarily resident (NOR) in the U.K. the bank or building society will pay the interest gross provided that it holds the relevant declaration. Declarations of non-ordinary residence can be completed by either the solicitor or the client but declarations of non-liability by U.K. residents will normally be completed by the client. However, in view of the difficulty of obtaining complete information about an overseas client, solicitors may feel that it is more appropriate for the client concerned to make the declaration, especially since it contains an undertaking to notify the bank or building society should circumstances change.
Where the tax deduction at source rules do not apply, the solicitor will receive interest from the bank or building society gross and may account to the client for it gross, even if the client is non-resident. The client will be assessed on the gross receipt (but a non-resident client may, by concession, not be assessed) and (unless the solicitor has been acting as the client’s agent for tax purposes – see below under ‘Solicitors as agents’) the solicitor himself or herself will not be assessed in respect of the interest.
Tax treatment of interest – Method B
Where Method B is used, deduction of tax at source does not apply to the solicitor’s general client account at either a bank or building society, and interest is therefore paid to the solicitor gross. When making a payment to the client of a sum in lieu of interest under the interest provisions, the solicitor should make the payment gross even if the client is not ordinarily resident. The Revenue’s view is that such payments may be treated as within Case III of Schedule D, so that the lower rate of tax on savings income may apply where appropriate. The client will be assessed to income tax on his or her receipt, but a non-resident may, by concession, not be assessed.
Wherever payments are made by solicitors to clients under Method B they can, in practice, be set off against the solicitor’s Case III assessment on gross interest received on general client account deposits; if the payments exceed the interest received, a Case II deduction can be claimed for the excess.
Stake money
Since 1st June 1992, stake money has been included in the definition of ‘client money’. Interest will be payable to the person to whom the stake is paid using either Method A or B above. But there will still be circumstances in which payment is not possible until a later tax year. Where this situation looks likely to arise, e.g. if the stake is held pending the outcome of litigation, the deposit would normally be placed in a general client account until it is established to whom the stake is to be paid. Because, in the meantime, interest will be included in the solicitor’s Case III assessment, it is again important to make provision for the tax liability to be met out of the interest as it arises.
Tax treatment of interest – money paid into court
The position of money paid into court is covered by the Supreme Court Funds Rules as amended. Where any order for payment out of money paid into court is made, the order should provide for the disposal of any interest accrued to the date of the judgement or order, and for interest accruing thereafter up to the date the money is paid out in accordance with the order. In the absence of such provision, interest accruing between the date of the payment into court, and its acceptance or the judgement or order for payment out, goes to the party who made the payment in, and interest from the date of the judgement or order follows the capital payment.
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