Repeal of provisions relating to the Interest and Royalties Directive
Published 3 March 2021
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This publication is available at https://www.gov.uk/government/publications/repeal-of-provisions-relating-to-the-interest-and-royalties-directive/repeal-of-provisions-relating-to-the-interest-and-royalties-directive
Who is likely to be affected
UK resident companies that make payments of annual interest or royalties to connected companies resident in an EU member state.
General description of the measure
This measure will repeal legislation that gave effect to the EU Interest and Royalties Directive (IRD) in UK law.
Policy objective
The measure will ensure that companies resident in EU member states will cease to benefit from UK withholding tax exemptions now that the UK no longer has an obligation to provide relief.
As a result, EU companies will no longer receive more favourable treatment than companies based elsewhere in the world, and the UK’s ability to withhold tax on cross-border payments of annual interest and royalties will be governed solely by the reciprocal obligations in double taxation agreements.
Background to the measure
This measure has not been previously announced.
Detailed proposal
Operative date
The measure applies to payments of interest and royalties made on or after 1 June 2021.
Current law
Sections 757 to 767 of the Income Tax (Trading and Other Income) Act 2005 contain the rules that gave effect to the IRD in UK law. The right of companies to make gross payments of royalties in circumstances where the IRD applied is set out in sections 914 to 917 of the Income Tax Act 2007.
Proposed revisions
Legislation will be introduced in Finance Bill 2021 to repeal sections 757 to 767 of the Income Tax (Trading and Other Income) Act 2005 and sections 914 to 917 of the Income Tax Act 2007.
Minor consequential amendments will also be made to:
- section 98 of the Taxes Management Act 1970
- paragraph 3 of Schedule 18 to the Finance Act 1998
- sections 369, 578 and 683 of the Income Tax (Trading and Other Income) Act 2005
- section 100 of the Finance Act 2015
- section 42 of the Finance Act 2016
In addition, the Exemption From Tax For Certain Interest Payments Regulations 2004 (Statutory Instrument 2004 No. 2622) are revoked and exemption notices issued under those regulations are cancelled.
Summary of impacts
Exchequer impact
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| - | +10 | +10 | +10 | +5 | Nil |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is not expected to have any macroeconomic impacts.
Impact on individuals, households and families
This measure has no direct impact on individuals as it seeks to withdraw relief currently available to companies under the terms of an EU directive that no longer applies to the UK.
The measure is not expected to have an impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts for those in groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on an estimated 250 businesses making payments of interest or royalties to connected companies in the EU. This measure seeks to withdraw the relief currently available to businesses under the terms of an EU directive that no longer applies to the UK.
For businesses making payments of interest or royalties, a one-off cost will include familiarisation with the change and could also include applying for a notice of permission not to deduct of tax under an alternative instrument. An estimated 100 businesses would incur continuing costs of withholding tax, keeping a record of amounts withheld, and reporting and paying the tax to HMRC.
Customer experience is expected to remain broadly the same as the majority of those businesses affected will already be familiar with the process of withholding tax from payments overseas and accounting for it to HMRC.
Operational impact (£m) (HMRC or other)
The additional costs for HMRC in implementing this change are anticipated to be negligible.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact the Tax Treaty Team by email: taxtreaty.team@hmrc.gov.uk.