HM Revenue & Customs (HMRC) has announced a pause on a longstanding concession related to withholding income tax on UK-source yearly interest paid to overseas lenders. This move affects UK borrowers who previously benefitted from a lenient approach towards administrative errors in withholding tax.
Under the previous arrangement, HMRC allowed borrowers who failed to obtain prior clearance to pay interest ‘gross’ but qualified for relief under a Double Taxation Agreement (DTA) to make voluntary disclosures. In such cases, HMRC would generally limit assessments to late payment interest only, easing the penalty burden on borrowers.
However, the Labour Party government’s tax concession has now been suspended. Legal experts at Travers Smith warn that this change will complicate and potentially delay UK cross-border financing and M&A transactions, where overlooked DTA relief applications are commonly identified during due diligence.
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The suspension introduces risks related to cash flow and administrative complexity for borrowers. While borrowers remain responsible for withholding and accounting for tax, and HMRC will recover any unpaid tax from them, overseas lenders must separately apply for DTA relief and seek repayments for any withheld or assessed UK tax.
HMRC stated: “We are currently reviewing the processes and legislation related to these concessions. During this review, we have paused the processing of disclosures involving failures to comply with withholding requirements, including related repayment claims and applications to assess only late payment interest.”
Further guidance from HMRC indicates that once the review concludes, they will update their manual and potentially reinstate or modify the concession regarding late payment interest assessments.
Borrowers are reminded of their obligation to disclose any non-compliance with withholding requirements promptly, despite the concession’s suspension.