INTM413232 - Transfer pricing: the main thin capitalisation legislation: payments of yearly interest overseas: claims for treaty relief where tax was not deducted
When this guidance does not apply
- This guidance does not apply where:
- there was no requirement to deduct due to a statutory exemption, or
- HMRC has issued a direction in relation to the payment which remains effective and payments were made in accordance with that direction, or
- the relevant deduction has been made, in which case relief is provided to the lender on application using the appropriate form (DT-Individual or DT-Company) – further information on such cases can be found at INTM413230.
This guidance does not set out how HMRC will resolve disclosures subject to the temporary pause in processing disclosures. Details on these cases can be found in INTM413205.
When this guidance does apply
This guidance does apply where a person made one or more payments of UK-source yearly interest to an overseas lender and:
- was required to deduct an amount representing income tax from that payment and make payment of income tax equal to that amount to HMRC,
- failed to make that deduction and instead made payment of the full amount to the lender (‘failure to deduct’), and
- the lender was the beneficial owner of that interest and resident in a jurisdiction with which the UK has a double taxation agreement (‘DTA’) whose interest article restricts the UK’s taxing rights over the interest.
This guidance also applies where a deduction was made, but of an insufficient amount.
In this guidance, ‘payer’ means the person by or through whom the relevant payment is made. This may be the borrower in a lending arrangement or, where appropriate, an agent or intermediary through whom the payment is made.
‘Lender’ means the person beneficially entitled to the interest.
When is there a ‘failure to deduct’
Whether or not there has been a deduction from a payment is a matter of fact established at the point of payment.
A contractual requirement to compensate for any deduction (a “gross-up” clause) does not, by itself, mean that a deduction was made. What matters is whether an amount was actually deducted from the gross interest liability before payment. Where the gross-up and net interest are paid together, this may be difficult to distinguish from a payment of the gross interest where no deduction was made. Contemporaneous records relating to the payment may assist in establishing what occurred.
Payers making a claim will be asked in the relevant claim form to confirm they have failed to deduct. HMRC may choose to enquire into claims to establish the facts around the payment. Where it is discovered that a borrower made a deduction and sought to claim under this process, the borrower may face assessments of any sums claimed, interest and penalties for any inaccuracies contained in that claim.
If a lender makes a claim for a repayment when they received an amount equal to the gross amount of the interest, it would be necessary for the lender to provide documentary proof that a deduction was in fact made and that the balance of the payment was a contractual gross-up. Otherwise, they will not have met the requirement in Paragraph 2(2) of Schedule 1A of TMA 1970.
If a lender demonstrates that a deduction was made, HMRC is entitled to assess any unpaid tax due from the payer, regardless of any claim from the payer for relief.
Claims following a failure to deduct
In cases where there has been a failure to deduct, the payer is liable for the resulting income tax charge and bears the economic cost of that charge. In these circumstances, HMRC will consider a claim from the payer for relief available under the relevant DTA as a result of the restriction the DTA places on the UK’s taxing rights.
HMRC will not accept a claim from the lender where the payer made no deduction. In those circumstances, the lender’s liability is limited to the amount actually deducted, which is nil. The lender therefore has no liability from which relief may be claimed and has suffered no tax that can be repaid.
Previous treatment of disclosures
Under a concession previously at INTM413230, HMRC would sometimes set aside the right to assess the payer on their tax liability, and collect only any accrued late payment interest (‘LPI’). Where the conditions for the concession were not met, tax would be collected from the payer and the previous guidance did not acknowledge a route for the payer to claim treaty relief in these circumstances.
Withdrawal of the concessionary treatment in INTM413230
HMRC has withdrawn the concessionary treatment at INTM413230.
This is effective from 2 November 2026 and applies to all disclosures of failures to deduct withholding tax received on or after that date. This includes disclosures where the failure occurred in a prior period.
Duty to correct
Taxpayers remain required to disclose any failure to deduct.