In the rapidly evolving world of cross-border finance, UK withholding tax remains a perennial headache, one made more acute as the law changes and market practices shift.
For lenders and borrowers alike, the familiar risk allocation mechanics are under review, concessions are disappearing, HMRC consultations are appearing, and the negotiating table is more competitive than ever.
At its simplest, UK withholding tax on interest payments (currently set at a rate of 20% rising to 22% from April 2027) is a deduction applied to payments of UK source interest unless an exemption is available. The scope, however, is more nuanced than many realise.
First, withholding tax on interest paid to companies only applies to yearly UK-source payments. “Short” interest (that is, interest on borrowings with a term of less than a year) escapes its grasp. And critically, it’s the source of the interest, not the borrower’s tax residence or presence, that matters (although a UK tax resident borrower will invariably be making UK source payments). For example, rental income from UK real estate servicing interest payments probably has a UK source even if the Borrower is not resident in the UK or acting through a UK permanent establishment.
This complexity can catch borrowers and lenders off guard, especially in multi-jurisdiction deals or where the underlying cash flows are less obvious. Although lenders may, in theory, reclaim withheld tax, the process can be burdensome, slow, and in practice sometimes impossible—especially for certain jurisdictions. Recent changes, discussed below, have only added red flags to this path.
One of the pivotal contract tools in loan documentation is the gross-up provision, the requirement for borrowers to compensate lenders if withholding tax is imposed. Under the Loan Market Association (LMA) drafting (often favoured by lenders), the borrower can withhold amounts only as legally required but must gross up lenders so their returns remain whole subject to one main exception. This exception applies, and so the borrower has no obligation to gross up, where the lender is not or ceases to be a “Qualifying Lender”, unless it has ceased to be a Qualifying Lender as a consequence of a change of law.
Therefore, from the borrower’s perspective, the definition of Qualifying Lender is crucial. Typically, a Qualifying Lender is one to whom, under the law as it stands when the agreement is signed, payments can be made without UK withholding either due to a domestic or EU exemption, or under a double tax treaty. The goal is that, unless the law changes, no withholding tax should be imposed and the borrower will not need to make gross-up payments. As a result, many borrowers negotiating tax provisions in facility agreements have historically been satisfied with including standard LMA Qualifying Lender terms.
Madeline Gowlett, Partner, Tax
In December 2025, HMRC suspended its long-standing concession that allowed UK borrowers who had failed to withhold income tax from payments of interest to overseas lenders (due to some part of the required procedural formalities having failed) to simply pay late payment interest, provided the lender was entitled to relief under a Double Taxation Agreement (DTA). This concession helped borrowers avoid substantial administrative burdens when paying gross interest to overseas lenders legitimately entitled to receive it without withholding, and allowed voluntary disclosure with limited penalties. The pause means that, unless borrowers have obtained formal confirmation of DTA relief from HMRC before making payments, they potentially remain liable for income tax as well as the (now significant) late payment interest (currently 7.75%), even if the lender was actually entitled to gross payments under a DTA. Subsequent confirmation of DTA relief does not necessarily cure earlier failures to withhold. Facility agreements typically allocate withholding tax risk to borrowers, requiring gross-up payments and cooperation regarding refunds. Ultimately, suspension of the concession increases both financial and administrative risks for UK borrowers.
In July 2026 HMRC published a consultation titled "Simplifying Treaty Relief from Withholding Tax on Interest Paid Overseas" with a deadline for responses of 7 September (one of a number of 'summer consultations' issued just in time for people to go on holiday). The consultation specifically stated that it was not seeking views on the pause of the concession discussed above, but acknowledged that the context for that pause was relevant to looking at ways to simplify the DTTP process. The key proposal was that borrowers should be able to 'self-assess' whether the tax treaty applies but that this would be at their own risk. If this is ultimately introduced this will further change the risk allocation provisions we discuss in this article, and so in the interests of simplicity, we have not commented further on this proposal for now.
Recent market practice has made risk allocation still more complex. Current borrower power in the loan markets (especially among sponsors with a significant deal churn and strong portfolios) has led to certain borrowers' assumption of risk narrowing. Such powerful borrowers are increasingly demanding bespoke provisions and forcing lenders to accept more risk and less protection. Some of the areas that we see Borrowers pushing back on include:
If the lender would not have faced withholding tax absent a change in law, the borrower conventionally bears the risk and must gross up. Yet, as borrower strength increases, deals now carve out more scenarios (such as Brexit, OECD Multi-lateral Instrument, BEPs/anti-avoidance) in which gross-up doesn’t apply.
The historic LMA position that borrowers cannot contractually rely on lender confirmations is being eroded. Lender confirmations of status are increasingly contractually enforceable or required with supporting evidence.
Rather than the default LMA risk-on-borrower provision, more deals now place the onus on lenders to take the risk that HMRC does not issue a direction or that Treaty formalities have not been complied with.
Lenders relying on the private placement exemption may not automatically qualify for gross-up protections unless documentation is tailored with this outcome in mind.
Lenders sometimes have an obligation to actively claim refunds if tax is withheld. Where the borrower improperly withholds or gross-ups, “wrong-pockets” clauses come into play—allowing borrowers to recover funds from lenders and, in some cases, set off against any other amounts owed. Where the Lender is at fault for a failure by the borrower to withhold (for example where the borrower), in certain instances borrowers are required to compensate for interest and penalties
Linked to the Tax Credits & Refunds, in the absence of HMRC’s concession, these provisions become more critical; borrowers may demand enhanced protections, such as the right to delay interest payments until clearance is received and stronger obligations on lenders to claim and pass back any tax refunds.
In risk-sharing arrangements, gross-up protections are increasingly excluded where the arrangement itself triggers a tax deduction.
While usually mirroring lender provisions, some deals further narrow gross-up obligations, leaving lender risk heightened where payments are made by a guarantor.
Many borrowers both in the UK and Europe now routinely exclude gross-ups where lenders are resident in non-cooperative jurisdictions.
Today’s landscape for UK withholding tax is anything but settled. The mechanics, risk allocation, and contractual protections are all in flux.
In this moving feast, both lenders and borrowers must be nimble, knowledgeable, and ready to negotiate. Agility, attention, and tailored drafting are key to avoiding unnecessary tax exposure and ensuring deals remain commercially sound.
