HMRC publishes new guidance on treaty relief where payer has failed to deduct
HM Revenue and Customs (HMRC) has published new guidance on how to claim tax relief if you paid UK-source yearly interest to an overseas lender without deducting tax.
The Withholding Tax Concession is Reincarnated
Overview
By way of reminder…
(or skip to The latest: new (interim) guidance for the existing rules.
Many double tax treaties with the UK allow for reduced (often nil) rates of withholding tax on payments of UK source interest to overseas lenders. However, to claim this relief procedural formalities (e.g. operating the Double Tax Treaty Passport (DTTP) scheme and the filing of accurate DTTP2 forms) are required, leading to numerous accidental non-compliance issues that technically trigger withholding tax obligations on the borrower.
Original Concession and 'Pausing'
HMRC had previously allowed a concessionary practice whereby borrowers could:
- voluntarily disclose such non-compliance, and
- provided the conditions for the relevant treaty relief were shown to be met and the procedural formalities rectified, just pay late payment interest on any 'failures to deduct'.
The operation of the concession meant the borrower could avoid being made liable for the tax that should have been withheld (and having to attempt to recover that tax from the overseas lender). This concessionary treatment was paused from around the start of 2025, although only publicly acknowledged in guidance by HMRC in December 2025.
Since then, there has been a long wait for further clarity, with borrowers, lenders, sellers and purchasers struggling to address the increased uncertainty in financings and M&A, and with new voluntary disclosures being sent to an HMRC queue that was starting to feel like a 'black hole'.
Summer Consultation
Recognising some of the issues caused by the current procedural processes (and the withdrawal of the concession), HMRC conducted a Consultation on Simplifying Treaty Relief from Withholding Tax on Interest Paid Overseas over the summer (between July and September).
The purpose was to "identify options to meaningfully simplify the administration of [treaty] relief, to make things simpler for taxpayers whilst maintaining robust safeguards against tax avoidance". One option considered was to replace the current application process for obtaining treaty relief (utilising the DTTP scheme) with a new self-assessed regime. Although the responses to the summer consultation have not (at the time of publication) been made public, it is understood that many respondents expressed concerns that such an approach risked undermining the certainty provided by the DTTP scheme.
Budget Day announcements
Alongside Budget 2026, the government published another consultation, this time on Corporate Tax Simplification for Business Investment. That document looks at several areas where the government states a wish to address "concerns about complexity, uncertainty and administrative burdens" with targeted reforms. Obtaining treaty relief from withholding tax on interest is one of the areas that the government has promised further action, policy design work, and engagement, on streamlining and simplifying the current treaty relief system.
This more detailed policy work will examine several options, including:
- A simpler process where lenders have obtained a 'passport’ for double tax relief
- A limited self-assessment procedure (addressing concerns about diluting certainty)
- Improved real-time information for both lenders and borrowers, and
- Providing solutions for more complex financing arrangements.
It is currently unclear when the work will begin or when the engagement will take place.
However, in the Corporate Tax Simplification for Business Investment document, the government also promised new guidance to assist businesses in operating the existing rules correctly. The guidance was published on 2 November 2026.
The latest: new (interim) guidance for the existing rules
The new guidance confirms that the original 'late payment interest only' concession has been formally withdrawn with effect from 2 November 2026; it is replaced with something that looks quite similar, and extends the current rolling, four-year, look-back period, but which imposes tighter requirements and formalities to bring a claim.
According to the interim guidance, which applies to new claims, and which may apply to paused claims (for which see below), UK borrowers can claim treaty relief where all the following conditions are met:
- The UK borrower has paid yearly interest
- To one (or more) overseas lender(s)
- At the time of the payment, the overseas lender(s) was/were resident in a territory that has a double tax treaty with the UK
- The UK borrower was required to deduct withholding tax – because it had not received confirmation of an entitlement to pay it gross – but did not do so (or did not deduct the full amount of withholding tax) from the payment, and
- The conditions for treaty relief were, however, met.
To claim, the UK borrower must complete a Form (published alongside the new guidance), providing details of the loan and the overseas lender to which the claim relates.
Each form can only cover one lender and one loan. In cases involving multiple lenders for a single loan, a separate form will be required for each lender. Equally, in cases involving multiple loans from a single lender, a separate form will be required for each loan.
Each element of entitlement to treaty relief for payments under that loan to that lender will need to be evidenced. This will include providing:
- Full details of the UK borrower and the overseas lender
- Full details of the loan, and the interest rate, payments dates, amounts, and tax deductions (if any)
- Full details of the relevant double tax treaty
- Evidence that the overseas lender was both:
- Resident in the relevant territory (i.e. the territory that has the relevant double tax treaty with the UK), and
- Entitled to the interest (i.e. is the beneficial owner of the interest)
- A declaration regarding whether the borrower and lender are 'connected' (essentially where one 'controls' the other, or a third-party controls both)
- A declaration that the claim is complete and correct.
HMRC have the power to request further information, and any inaccuracies in a claim can result in penalties being charged.
Where the claim is successful, the unpaid withholding tax is treated as discharged (and any tax actually withheld due to not having received confirmation to pay gross in time, will be repaid). Late payment interest will, as was always the case, be charged from the date on which the payment of tax was due until the date a valid claim is submitted (or the date on which the tax due was paid). It is worth noting that HMRC expressly reserve the right to open an enquiry into a claim, even if it has been processed and approved (under normal 'process now, check later' rules).
Interaction with 'paused cases'
HMRC have stated that it "is still considering how to deal with disclosures made before 2 November 2026 which are within the pause on processing". Further guidance on how HMRC will deal with such disclosures has been promised, and taxpayers are encouraged not to contact HMRC at this point.
However, HMRC have also stated that any UK borrower that has "existing disclosures of failures to deduct" may make a claim for prior periods (subject to applicable time limits).
Our reading of this is that borrowers can make a fresh claim under the interim guidance in respect of paused claims, but only for failures to deduct going back four years (so, for example, it would not be possible in respect of paused claims relating to financial year 2021/22).
Where such claims are made, HMRC have stated that they will consider the new claim under the new procedure, as outlined in the interim guidance, and the resolution of the new claim will also resolve the existing paused claim.
Borrowers wishing to utilise this approach should (in the appropriate boxes on the form) provide HMRC with the date of the original disclosure, and the reference used in correspondence, to help HMRC to identify and process claims relating to the paused case.
A possible implication of this interaction between new and paused claims is, in our view, that HMRC may be considering a 'softer' approach to paused claims (perhaps they will ultimately allow them to benefit from the original concession) but that they have not yet decided.
So what?
This is a development that should be cautiously welcomed. The interim guidance preserves 'late payment interest only' treatment, with a four-year look back, pending more comprehensive reform of the double tax relief claims process. The new process, while administratively awkward and more burdensome, does provide some certainty for the current (and future) tax years, and should provide some comfort in cross-border finance flows and M&A transactions where this is a 'live' due-diligence risk.
However, our overall take on the process is that it is not entirely straightforward, necessitates the careful collection of evidence, and is form-based (not digital); it is therefore unlikely to be quick.
The promise of further policy reform and engagement with business is also to be welcomed.
Those affected are encouraged to engage fully and openly with the government's policy design work and any future consultation to ensure that the future process for obtaining treaty relief is as simple, unobtrusive, and efficient as possible.
How we can help
The Travers Smith Tax team has extensive experience facilitating treaty relief applications and negotiating finance and sale and purchase agreements in the context of withholding tax risks. We can help affected businesses review their finance documentation to assess their exposure and respond appropriately. We also engage constructively with government consultations regularly, representing the interests of our clients and business more widely.
For more information on this topic or how we can help please contact a member of our tax team.
The new interim guidance is here: Claim tax relief if you paid UK-source yearly interest to an overseas lender without deducting tax and the new claim Form (WHT treaty relief) is here: Form: Withholding tax treaty relief.
Our Briefing on the withdrawal of the concession is here: Withholding the withholding tax concession: HMRC pauses concession for errors when withholding tax on interest | Travers Smith.
