Simplifying Treaty Relief from Withholding Tax on Interest Paid Overseas

Question 1

Subject of this consultation

Accepted Answer

This consultation seeks views on whether and how the administration of treaty relief from the UK’s withholding tax regime on payments of interest to overseas lenders could be simplified or reformed whilst maintaining effective protection against profit-stripping.

Question 2

Scope of this consultation

Accepted Answer

The government has not yet determined how best to reform the current regime. The purpose of this consultation is to present a range of potential approaches and to invite views from stakeholders on their relative merits, risks, and practical impacts.

Question 3

Who should read this

Accepted Answer

The government is open to receiving representations from all interested parties and stakeholders and is especially interested in responses from organisations who have experience in paying interest overseas, experience of withholding tax in the UK and/or other jurisdictions, and tax advisors with experience of supporting clients through this process.

Question 4

Duration

Accepted Answer

This consultation will run for 8 weeks from 13 July to 7 September.

Question 5

Lead official

Accepted Answer

The lead official is Alan Compton of HM Revenue & Customs (HMRC).

How to respond or enquire about this consultation

Responses to or queries about this consultation can be sent by e-mail to simplifyingtreatyreliefconsultation@hmrc.gov.uk or by post to:

Base Protection Policy Team
HM Revenue and Customs
Floor 7, 1 Atlantic Square
Glasgow
G2 8HS

When responding to questions please indicate the number of the question you are responding to.

You do not need to provide answers to all the questions in order to submit a response.

For all questions, please submit any relevant supporting data alongside the response, even if it is aggregated and/or anonymised.

If there are any questions on aspects of this document, please contact us at the e-mail above.

Question 6

Additional ways to be involved

Accepted Answer

There may be an opportunity to contribute through round tables and other events through which stakeholders can contribute to future policy development. If you would like to be involved in these events, please email simplifyingtreatyreliefconsultation@hmrc.gov.uk

If you would like to request an accessible version of this document (for example, in large print, easy-read format or Braille) please contact us at the e-mail above.

Question 7

After the consultation

Accepted Answer

The government will analyse the consultation responses and publish a summary of responses after the consultation closes.

Question 8

Getting to this stage

Accepted Answer

This is a new consultation.

Question 9

Previous engagement

Accepted Answer

This is a new engagement with stakeholders on this subject.

Question 10

1. Introduction

Accepted Answer

As a matter of long-established principle, the UK asserts a sovereign right to tax income that arises here, reflecting that income generated from UK economic activity should bear an appropriate share of UK tax. This source-based taxing right underpins many elements of the UK tax system and is in line with international tax norms. It is a feature of most countries’ tax systems that non-residents are taxable on certain types of income that arise in that country.

Interest is typically one such type of income and, to exercise their taxing right, countries commonly require the payer of interest to withhold a sum representing income tax (‘withholding tax’) from the payment and account for this to the relevant tax authority. The UK adopts this approach, and the relevant rules are outlined at Part 15 Income Tax Act 2007 (‘ITA 2007’).

Withholding from payments of interest is an important safeguard to ensure the UK can collect tax on cross-border income flows and to protect the integrity of the UK tax base.

Wider than merely the taxation of interest payments themselves, the tax on UK-source interest plays a crucial function in preventing profits from UK business activity and real property being paid out as tax deductible interest to untaxed or minimally taxed overseas parties connected to the owner of the business or property. Tax on UK-source interest is therefore one of the protections against base erosion using interest deductions (‘profit stripping’) and is especially important for closely held businesses that would otherwise be able to avoid UK tax on their profits using relatively simple offshore arrangements. Withholding is a key mechanism through which this tax is enforced.

To facilitate cross-border flows of capital without distortion, and to remove a significant barrier to UK businesses’ access to global capital markets, the UK provides effective relief from withholding in respect of cross-border payments of interest in many circumstances, both through our network of double taxation agreements and through non-treaty exemptions.

The interest provisions in tax treaties are a matter of careful negotiation between States. The UK seeks to agree the best reciprocal terms with treaty partners, which generally reduce the rate of withholding tax that each country would otherwise impose on a payment of interest made to a non-resident under domestic law. This reduces costs for business while sharing the taxation of such payments between both countries.

The protection afforded by withholding tax is an important aspect of the UK tax system, though the government recognises the administration of treaty relief may create administrative and compliance challenges. The government is committed to maintaining an attractive and competitive business environment while ensuring tax compliance, and to simplifying the tax system where possible.

This consultation considers the administrative requirements for withholding tax from payments of interest overseas with the goals of reducing unnecessary burdens, and simplifying the tax system to make it more efficient, while safeguarding policy objectives and protections of the UK tax base.

Withholding obligations on payments other than payments of interest to overseas lenders are not within the scope of this consultation.

Question 11

2. Current Processes for Withholding Tax on Interest

Accepted Answer

Summary of the Existing Regime

The charge to income tax on interest is contained in Chapter 2 of Part 4 Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Section 371 ITTOIA provides that the person “receiving or entitled to the interest” is liable for tax charged under Chapter 2.

Section 874 ITA 2007 provides for the circumstances in which an obligation to deduct from payments of interest arise, and the various exceptions from this obligation are outlined at Sections 875-888E. Collection of income tax deducted is covered in Chapter 15 of Part 15 ITA 2007 for most companies, and Chapter 16 where the payment was made by a person other than a UK-resident company.

Within the current rules, companies and certain other persons paying interest have an obligation to deduct from those payments an amount representing income tax at the basic rate. Broadly, ‘yearly interest’ (generally interest arising on a debt capable of lasting a year or more) is within the rules, whereas ‘short interest’ (on loans of less than a year) is not. The rules most commonly apply in two scenarios:

when a UK company (or local authority or partnership including a company) pays interest to an individual or other non-corporate lender
when interest is paid to any person whose usual place of abode is outside the UK
it is the second category, interest payments from UK payers to overseas payees, which are the subject of this consultation

The UK has a wide network of Double Taxation Agreements (‘DTAs’) which often reduce or remove the UK’s taxing rights over payments of interest to residents of the treaty partner. However, treaty relief from interest withholding is not automatic. The overseas recipient (or in some circumstances the UK payer) must apply for and obtain a direction from HMRC before the interest can be paid with a reduced (or zero) rate of withholding. Until HMRC grants this direction, the UK payer remains obligated to deduct at the basic rate of income tax and return the sums deducted to HMRC. The payee may then submit a claim for a refund of tax from HMRC if they are entitled to relief under the relevant treaty. While this eventually provides relief, it generally results in a cash-flow disadvantage, relies on a valid claim being made, and increases administration for both the lender and HMRC.

To ensure that treaty benefits are only conferred in appropriate circumstances, and that HMRC has an appropriate level of visibility over cross-border income flows, the processes to claim treaty relief on a payment of interest involve several steps by both parties to the payment.

Relief is generally claimed using the DT-Company or DT-Individual forms. These require details of the payment, the payee, and the underlying Double Taxation Agreement.
Once received, HMRC may issue a direction permitting future payments be made at the treaty rate (or gross) for a period of five years. These directions cease to have effect should events specified on the directions occur.
These processes have been expedited by the operation of the Double Taxation Treaty Passport (DTTP) scheme, under which overseas corporate lenders can apply for a ‘treaty passport’. Once granted, the process to permit the UK payer to withhold at the treaty rate is streamlined – though importantly still requires an HMRC direction on a loan-by-loan basis.

HMRC has also operated concessionary treatment by which tax which otherwise would be assessed on the UK payer following a failure to operate the withholding process is not pursued to the extent that it is clear that any tax collected would be repaid to the lender under the terms of a DTA. Operation of this concession is currently paused whilst the underlying policy and conditions are reviewed.

The operation of the concession, and its subsequent pause, are not within the scope of this consultation, and the consultation does not seek views on whether that concession should be reinstated or modified. However, the experience of the concession, and the issues arising following its pause, provide relevant context in illustrating some of the underlying administrative challenges and risks within the current system, particularly where relief is available in principle but difficult to obtain in practice. This context has informed the government’s consideration of whether there is scope to simplify the design and administration of treaty relief on payments of interest.

In summary, the current system in relation to treaty relief involves a requirement to withhold tax unless advance clearance is obtained. It protects the Exchequer by placing the onus on the UK payers to deduct tax on cross-border interest by default, whilst providing mechanisms to reduce that burden when appropriate.

There are important non-treaty exclusions that mean not all interest payments within the above definition are subject to withholding. Various categories of interest are exempt from withholding under domestic law, such as interest paid by banks and building societies in the normal course of business. Such exclusions are not the focus of this consultation.

Challenges of the Current Regime

We acknowledge that the current processes can be costly and challenging to navigate. Stakeholders have highlighted the administrative burden and risks for lenders, borrowers, and HMRC.

The complexity of the treaty relief rules can lead to uncertainty and error, with relief not always operating effectively in practice, leading in some instances to disproportionate consequences where mistakes have occurred. Compliance with the rules can be costly for taxpayers and HMRC, and feedback to date suggests the administration of treaty relief may compare unfavourably to some international comparators as well as the UK system for payments of royalties.

Question 12

3. Minimising the Cost and Risk of Obtaining Treaty Relief

Accepted Answer

The challenges outlined above have led to calls for changes to the system, such as simplification of the processes under which directions are granted or allowing the payer of interest to self-assess treaty relief (as is the current position for payers of royalties) at their own risk. The government is interested in exploring the details of such reform.

The government has not yet determined how best to reform the current regime. The purpose of this consultation is to present a range of potential approaches and to invite views from stakeholders on their relative merits, risks, and practical impacts. This is in order to deliver meaningful simplification of available relief in a revenue neutral manner.

Any simplification must balance reducing burdens with safeguards. The obligation to withhold is a key anti-avoidance measure and without it there is a risk that profits could be stripped out of the UK and avoid taxation entirely. Reforms that relax requirements would require appropriate safeguards to ensure that opportunities for avoidance or evasion do not arise.

Under current rules, payments of UK-source interest to overseas payees are subject to withholding tax requirements unless exemptions apply. Where the payment of interest is covered by the interest article of an underlying double taxation agreement, treaty relief must be confirmed by HMRC via a direction before treaty relief can be provided at source.

Stakeholders have raised concerns that the current process can result in delays, administrative complexity, uncertainty and unnecessary cash-flow impacts. In many cases, initial withholding is required even where relief is ultimately available, resulting in complexity and administrative repayment processes with limited Exchequer benefit.

Question 1 – To what extent do the current processes for obtaining treaty relief on interest create delays, costs, or administrative burdens? Which specific aspects cause the most difficulty? Please provide examples or evidence where possible.

Question 2 – How well does the current process for obtaining directions in advance of payments of interest allow easy and certain access to treaty relief?

Options for change

One option could be to allow UK payers to apply treaty relief at source without prior HMRC direction where the payer believes the conditions for treaty relief are met. This could operate on a self-assessment basis, with the UK payer responsible for determining whether treaty relief applies. HMRC would retain the ability to review eligibility through compliance activity.

This would broadly align the treatment of interest with the approach currently taken for royalties, where treaty relief may be applied without advance clearance, at risk of penalties and interest if the payment was not eligible for relief. Potential advantages of this approach include reduced delays to commercial transactions where otherwise interest would have to be subject to deduction (and ultimately repayment claims) and reduced administrative costs for the payer, lender, and HMRC.

Question 3 – Should UK payers of interest to lenders in jurisdictions with whom the UK have a double taxation agreement be permitted to apply treaty relief on interest payments without prior HMRC clearance? What would be the benefits and risks of this?

Question 4 – How would moving to self-assessment of treaty relief benefit your business (such as time saved, reduction of fees, cash-flow improvements, greater certainty)?

The government would need to consider appropriate safeguards, including exclusions from the entitlement to self-assess, reporting requirements, and penalties for misapplication or non-compliance with reporting obligations.

Question 5 – Do you have a view on how interest payers would satisfy themselves that all the requirements for treaty relief are met before applying treaty relief to payments? What experience do you have in other jurisdictions where self-assessment of treaty relief is possible? How well does this work?

Question 6 – Should self-assessment of treaty relief only be available where the risk of base erosion is low because the payer is subject to other effective restrictions on interest deductibility? If so, what would be a good basis for a threshold (such as being subject to transfer pricing rules, having net finance costs exceeding the de minimis for Corporate Interest Restriction, being subject to Pillar 2, or some combination of these)?

Question 7 – Would it be necessary or helpful to introduce a facility for interest-payers to obtain certainty in advance of paying interest that HMRC agrees treaty relief is available? How might such a facility work? Are you aware of other jurisdictions providing such a facility?

Question 8 – Are there other jurisdictions you have experience of where the administrative burden to obtain treaty relief is low, but the regime still provides effective protection against base erosion using interest? What are the requirements in such jurisdictions when paying cross-border interest? How is protection against base erosion achieved (particularly for owner-managed businesses)?

Question 9 – Do you have any comments on the potential impacts of these changes on tax receipts or avoidance/evasion behaviour? We are especially interested in how businesses and lenders might respond to changes.

Maintaining effective reporting requirements would be a crucial aspect of any simplification, even where no UK tax is payable. Reporting enables HMRC to understand the scale and nature of relieved transactions, assess whether relief is being applied appropriately, and target compliance activity proportionately, without relying solely on the withholding mechanism. It also helps ensure any simplifications to withholding requirements do not result in UK-source income falling outside effective oversight. The government is cognisant of balancing the need to ensure effective reporting against not duplicating obligations on businesses, including in light of proposals for the implementation of the International Controlled Transactions Schedule.

Question 10 – What reporting requirements are imposed in other jurisdictions in which you have significant operations/investments?

Question 11 – Would it be significantly burdensome to report payments made with complete relief (so that no UK tax is due) in the CT61, alongside payments made without relief or with partial relief? Would it be preferable instead to report them alongside treaty rated cross-border royalty payments in the CT600H? Why?

Maintaining proportionate sanctions for non-compliance, including failures to meet reporting or administrative requirements where no tax is lost, is important to reinforce the importance of timely and accurate reporting, encourage consistent standards of behaviour, and deter the perception that administrative obligations are optional where no immediate tax is payable. This, in turn, supports HMRC’s ability to monitor compliance effectively and protects the integrity of any system in which withholding obligations or reporting requirements are simplified.

HMRC utilise a range of sanction types to encourage compliance and protect the integrity of the tax system, reflecting both the nature of the failure and the risk posed. Tax-geared penalties are calculated by reference to the amount of tax understated or underpaid. HMRC also charges penalties of fixed sums for certain errors or failures. Penalties are sometimes scaled by the behaviour resulting in the failure (such as carelessness or deliberate conduct).

Question 12 – What sanctions are imposed in other jurisdictions in which you have significant operations/investments?

Question 13 – What would be a proportionate but effective set of sanctions for non-compliance in this area? How should this apply in the following circumstances?

where treaty relief is applied but the conditions for relief being available are not met
where treaty relief is applied, the conditions for relief are met, but there has been a failure to comply with any requirement in advance of the payment (such as to obtain a certificate of residence or creditor certificate)
where treaty relief is applied, the conditions are met, but there has been a failure to comply with reporting requirements after the payment

Question 13

4. Other Questions

Accepted Answer

As part of any reform of existing rules, the government is committed to a policy design which addresses the current needs of UK business and which is suitable for future developments.

Question 14 – Are there any other options or ideas for simplifying the withholding process on interest that you believe the government should consider? This could include international examples not mentioned above, or innovative uses of technology or data sharing.

Question 15 – Do you have any other comments in relation to changes which could be made to the current system for withholding on payments of interest and how these would impact (positively or negatively) to your/your clients’ organisation? This may be in the form of time saved per transaction, reduction in fees, cash-flow.

Question 14

5. Assessment of impacts

Accepted Answer

Summary of impacts

Year	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031	2031 to 2032
Exchequer impact (£m)	[EMPTY]	[EMPTY]	[EMPTY]	[EMPTY]	[EMPTY]	[EMPTY]

Impacts	Comment
Economic impact	Publication of this consultation is not expected to have any significant macroeconomic impact. Any economic impact will be estimated following the consultation, which would provide the final scope and design of the measure, and it will be subject to scrutiny by the Office for Budget Responsibility.
Impact on individuals, households and families	Publication of the consultation document is not expected to have any impact on individuals, households or families. The options presented in this consultation are expected at this stage to have no impact on individuals, as they would likely only affect businesses. Any impacts of subsequent policy measures will be fully examined.
Equalities impacts	It is not anticipated that there will be impacts on those in groups sharing protected characteristics from publishing the consultation document. Any impacts of subsequent policy measures will be fully examined. A full equality impact assessment is not recommended at this stage.
Impact on businesses and Civil Society Organisations	Publication of the consultation document is not expected to have any impact on businesses or civil society organisations. The proposals outlined in the consultation would impact companies and other businesses, though the nature of any impacts would depend on subsequent decisions. Any future impacts of subsequent policy measures will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	Publication of the consultation document is not expected to have any impact on HMRC. Any future impacts of subsequent policy measures will be fully examined and detailed.
Other impacts	No other impacts have been identified.

Exchequer Impact Assessment

Any Exchequer impact will be estimated following the consultation, which would provide the final scope and design of the measure, and it will be subject to scrutiny by the Office for Budget Responsibility.

Question 15

6. Summary of consultation questions

Accepted Answer