After an extended pause, HMRC have published updated guidance on how they deal with failure to deduct withholding tax on payments of interest overseas going forward, but questions remain on existing disclosures.
What is withholding tax and when does it apply?
UK companies are required to deduct income tax at source (‘withholding tax’) at a current rate of 20% from payments of ‘yearly’ interest that they make to overseas entities, individuals and partnerships, subject to some exclusions. The tax withheld is paid to HMRC alongside the completion of Form CT61. Interest payments between UK companies are not subject to withholding taxes.
The recipient can often claim relief for the withholding tax suffered against its UK or overseas tax liability though conditions apply.
‘Yearly interest’ isn’t defined but broadly constitutes interest on loans capable of lasting more than a year. Interest is paid when it is paid in cash, via the issue of a funding bond (typically PIK notes) or in certain cases by book entry.
Considering payments overseas, often a reduced or nil rate of withholding can apply under the relevant Double Taxation Treaty (“DTT”). However, a company must obtain clearance from HMRC in advance to pay interest using the treaty rate of withholding, even when the lender has a passport under the Double Tax Treaty Passport Scheme (this simply speeds up the clearance process).
What happened when withholding tax was missed?
Where companies have not deducted tax but should have, HMRC can collect the tax, late payment interest and potentially penalties. In such cases clearance applications should be made promptly to cover future payments and a voluntary disclosure to address the missed deductions of tax at source.
Where the recipient should have been able to benefit from a DTT, HMRC historically operated a concessionary treatment such that tax was not collected after a valid treaty claim was made, but late payment interest was charged on the underpaid tax from the date it should have been paid until the date of the claim.
This concessionary treatment was paused in early 2025 and one can only imagine a growing backlog of voluntary disclosures accumulating in HMRC’s inbox for nearly two years.
What’s now changed?
New guidance from HMRC sets out a revised process which still offers some key practical concessions but takes a more rigorous and structured approach with a clear allocation of responsibility to the borrower.
A company can now claim for treaty relief to apply to the interest payments on which withholding tax was missed, providing the conditions below are all met:
- The UK borrower paid yearly interest to an overseas lender,
- Tax should have been withheld, but was not,
- When the payment was made, the lender was resident in a territory that had a DTT with the UK,
- At the time the payment was made, clearance had not been received to pay at the treaty rate, and
- The conditions for treaty relief were met when the payments were made.
A claim should be made within four years of the end of the tax year that the claim relates to. E.g. interest payments made in the tax year to 5 April 2026 must be included in a claim submitted by 5 April 2030.
In such circumstances HMRC will not seek to recover the missed withholding tax but will still apply late payment interest. This late payment interest is not tax deductible and HMRC have explicitly said they may open enquiries into submitted claims.
HMRC may seek to recover tax on payments for which a claim is out of time – so at the time of writing this means interest payments made on or before 5 April 2022, although this remains unclear right now.
Claim forms should be emailed to HMRC and no timescales for responses are currently published. It could be a long wait given the backlog of claims…
What’s happening with disclosures made when the concession was paused?
HMRC is still considering what to do with these disclosures and has asked taxpayers and advisors not to contact them about it.
HMRC have said that companies with “existing disclosures of failure to deduct” may make claims for prior periods, subject to the four year time limit. Consideration is required to determine if this is the right approach for existing disclosures on a case-by-case basis.
How can we help?
Navigating withholding taxes is complex and we can help you understand and fulfil your compliance obligations.
Whether this is establishing if interest on a loan is in scope (it’s not always immediately obvious who the recipient of income is, particularly with syndicated loans), resolution of missed deductions, liaising with HMRC regarding on-going claims and enquiries, or obtaining clearances in advance.
Please get in touch with our specialist tax advisors below.
