Withholding the withholding tax concession

HMRC has confirmed it has paused a long‑standing concession that dealt with administrative failures to withhold income tax from payments of UK source yearly interest to overseas lenders. The concession allowed borrowers to make a voluntary disclosure and, in qualifying cases, be assessed only for late payment interest.

The concession applied where a UK borrower had not obtained HMRC clearance to pay interest 'gross', paid an amount of interest 'gross', but where the overseas lender was entitled to relief under a Double Taxation Agreement (DTA).

HMRC has suspended this pragmatic approach while it reviews processes where a DTA modifies the requirement to withhold on cross‑border interest.

UK borrowers are required to withhold income tax at the basic rate (currently 20%) from payments of UK source yearly interest to overseas lenders. Although the interest represents the lender's UK income, the borrower is obliged to account to HMRC for the tax on the lender's behalf.

Subject to satisfying certain conditions, relief from withholding tax is often available under a DTA. Treaty relief allows a borrower to pay the interest either 'gross' (without withholding) or at a reduced rate. However, DTA relief must be claimed by the overseas lender and must be supported by a certificate of tax residence from the lender's local tax authority.

Where a claim succeeds, HMRC issues a clearance notice permitting the UK borrower to pay interest gross (or at a reduced rate). Crucially, until clearance is received, the borrower must continue to withhold and account for tax on interest paid to the overseas lender. 

The UK's Double Taxation Treaty Passport (DTTP) scheme is an administrative simplification that can speed up the processing of claims. The DTTP does not, however, remove the requirement for a clearance notice before making payments of interest gross (or at the reduced rate).

If entitlement to DTA relief has not been confirmed, and the borrower fails, for whatever reason, to withhold and account for tax, HMRC can recover the tax from the UK borrower and charge late payment interest.

In addition, a subsequent confirmation that a lender is entitled to DTA relief does not 'cure' a failure to withhold from payments made before receiving clearance. It follows that the borrower must still account for the tax on those payments, even though it has effectively already paid that over to the overseas lender (as part of a 'gross' payment of interest). Late payment interest will also be due, at the Bank of England base rate plus 4% (7.75% from 9 January 2026).

By concession, HMRC did not enforce the full assessment and repayment process where:

• The UK borrower made a genuine error,

• The overseas lender applied for, and was granted, clearance to receive interest gross, and

• The lender would have been entitled to repayment of any tax that should have been withheld.

Borrowers could make a voluntary disclosure of the failure to withhold and apply for a 'late payment interest only' assessment by evidencing entitlement to DTA relief.

The concession reflected commercial reality that the lender was entitled to 'gross' interest and avoided substantial administrative work for lenders (in making repayment claims) and borrowers (in recovering amounts from lenders).

HMRC has paused the operation of this concession.

The pause has immediate consequences that may slow and complicate UK cross‑border financing and M&A transactions (where failure to file applications for DTA relief are frequently uncovered in due diligence):

1. Cash flow risk

In the absence of concessionary treatment, UK borrowers may be assessed for income tax on interest already paid gross to overseas lenders, even where the lender was factually entitled to receive it without withholding. Buyers of target groups which have failed to apply for DTA relief need to consider how they obtain financial protection for the liability to pay this tax if HMRC does not reinstate the concession in due course.

2. Disclosure

Corporate groups which identify a failure to claim DTA relief on interest payments should take steps to rectify this going forward and should consider making disclosures in respect of the historic position. It is thought that making a disclosure will "stop the clock" on late payment interest in respect of any tax payable, although this has not been confirmed in HMRC's guidance.

3. Administrative burden

Formal HMRC clearance must be obtained before paying interest gross. Transaction timetables may need to accommodate the full process of claiming DTA relief and waiting for HMRC confirmation. Depending on complexity, this can take several months.

4. Complicated situations

Although the borrower must withhold and account for tax (and HMRC will recover unpaid tax from the borrower) the overseas lender must apply for DTA relief and for any repayment of UK tax withheld or assessed. This split of responsibilities can cause issues, for example:

• • Insolvency of the overseas lender: the borrower may be unable to recover tax paid in error if the lender no longer exists.

• • Breakdown in commercial relationships: recovery may be difficult if the lender is reluctant (or refuses) to cooperate, particularly where it has no incentive to do so. Borrowers should ensure that their facilities agreements contain provisions obliging lenders to seek repayment of, and refund, any tax that they are entitled to recover. However, even with the benefit of these provisions, enforcement against a reluctant lender may be time-consuming and costly.

5. Finance agreements

Facility agreements typically allocate withholding tax risk to the borrower and include gross‑up clauses requiring payment of the interest amount as if no withholding applied, irrespective of clearance to pay without withholding. The concession provided the borrower with some comfort in treaty lender situations; its pause will make 'gross-up' clauses potentially harsher. Depending on the relative negotiating positions of the parties, borrowers may seek to delay payments before receiving HMRC clearance and push for stronger indemnities to cover the increased tax risk.

The pause does not change the obligations on:

• overseas lenders to apply to HMRC for a direction that prospective interest payments should be made 'gross' (or at a reduced treaty rate), or

• UK borrowers to disclosure previous failures to deduct tax from payments already made.

HMRC have confirmed that where a voluntary disclosure, and an application for 'late payment interest only' concessionary treatment, is made before 5 April 2026, the 2021-22 tax year will fall within the disclosure and concession application under the normal four-year time limits.

Businesses potentially affected should review their position promptly and consider making disclosures and applications as soon as possible, and in any event before 5 April 2026, to maximise access to the concession.

In the longer term, it is unclear why HMRC is reviewing the withholding tax processes or what the outcome of the review might be. One could hope for improvements to (or even replacement of) the DTTP to deliver faster, more efficient access to DTA benefits. However, the pause aligns with a broader trend of HMRC seeking to tighten procedural controls in international tax compliance.

Businesses should closely monitor developments in this area in the coming months.

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 risk. We can help affected businesses review their finance documentation to assess their exposure and respond appropriately.

For more information on this topic or how we can help please contact a member of our tax team.