Background
Payers of interest are required to withhold income tax at the basic rate from payments of UK source yearly interest to overseas lenders.
Relief from withholding tax is often available under a relevant double tax treaty on submission of an appropriate claim. Many treaties provide for a reduced or nil rate of withholding.
However, withholding tax is due at the full rate (currently 20% but expected to rise to 24% from April 2027) unless and until HMRC issue a direction authorising the UK borrower to pay at the reduced rate.
HMRC announced last year that they were reviewing their practice where a taxpayer failed to withhold tax on interest in advance of an appropriate treaty direction being in place.
They have announced now a new strict process for claims for relief by payers in these circumstances.
The former practice
Where a borrower had made a payment without withholding, but the lender subsequently received clearance to pay at the treaty rate, HMRC would typically not look to collect the tax that was strictly due (as this could then simply be claimed back by the overseas recipient). However, they would often raise a “late payment interest” assessment, under which the borrower was liable to pay interest on the withholding tax which accrued from the date that the withholding should have been accounted for to HMRC until the date that a direction was issued.
Late last year, HMRC announced that they were reviewing the operation of this concession and would pause their review of disclosures of failures to withhold during this period.
New guidance
HMRC has now published revised guidance in their manual. This states that, where there is a failure to deduct, HMRC will consider a claim for treaty relief by the payer, as opposed to the lender. Where a claim for failure to deduct is successfully made, HMRC will provide relief by discharging the obligation to pay the unpaid withholding tax. As before, late payment interest will be collected by HMRC and this will run from the date that the tax was due on the CT 61 until the date of the claim.
There is a new claim form to be submitted by the payer to make this claim.
The guidance states that HMRC may decide to enquire into a claim to establish the facts around the payment.
The time limit for a claim by the UK payer is four-years from the end of the income tax year in which the interest payment triggered the obligation to deduct tax.
Comment
This new claim process is likely to lead to a similar outcome to the previous concession but note that interest will accrue on any unpaid amounts until the required claim has been accepted by HMRC.
In our experience, HMRC did not always seek to assess late payment interest, whereas under this new scheme it is likely that they will do so in every case.
It is unclear why HMRC have decided to change their process, which will inevitably lead to additional administrative burden for taxpayers. This announcement is also somewhat puzzling given the suggestion in the recent Consultation on Simplifying Treaty Relief from Withholding Tax, that HMRC were considering whether borrowers would be allowed to self-assess the availability of Treaty Relief.
HMRC is still considering how to deal with disclosures of failure to deduct made before the date of the announcement of 2 November 2026 which fell within the pause on processing period and where no claim been made by the UK payer.
HMRC guidance says that taxpayers within this category need not contact HMRC. However uncertainty exists as to what action a UK payer who has previously notified HMRC that interest has been paid without deduction should take. For example will HMRC still afford the concessionary treatment whereby interest would run on the withholding tax until the date that the treaty clearance applied, or if a claim is now made under the new procedure will HMRC automatically charge interest until the date of the claim. This later approach would seem unreasonable.
Companies where the 4 year time limit for making a claim is likely to apply soon may want to consider making the claim, others might want to wait until the position is clarified by HMRC with further guidance.
Companies who would like to discuss this change should contract Paul Rogerson or their normal CWE contact.