Simplifying treaty relief from withholding tax on overseas interest

The purpose of the consultation is to review and simplify the current system for claiming relief from UK Withholding tax where interest is paid to overseas lenders under a relevant Double Taxation Agreement (DTA). 

• The consultation aims to reduce administrative burdens while maintaining appropriate safeguards against abuse. 

Under the current rules, UK companies paying interest to non-UK recipients are generally required to deduct Income Tax at the basic rate, currently 20%, unless a treaty provides for a reduced rate or exemption. 

• To apply the reduced or nil rate, the overseas recipient typically must apply to HMRC in advance using a clearance process. 
• Until HMRC grants this direction, the payer of UK interest must still withhold Income Tax on payments.
• The taxpayer can then submit a claim for a refund of tax from HMRC, which causes a cash flow disadvantage, relies on a valid claim being made and increases administrative burden.

Interest paid by banks and building societies in the normal course of business is not the focus of this consultation. 

The consultation explores replacing or reforming this clearance system with a more straightforward mechanism. The key proposals include:

• Introducing a simplified process that allows treaty relief to be applied at source without requiring prior HMRC approval in every case.
  • This could operate on a self-assessment basis.
• Reducing duplication of information and aligning requirements with existing international tax reporting obligations, such as royalties.

HMRC are also considering safeguards to ensure the system is not misused. These may include:

• Exclusions from the entitlement to self-assess.
• Maintaining effective reporting requirements.
• HMRC would retain the ability to review eligibility through compliance checks.
• Establishing penalties or corrective mechanisms where relief is incorrectly applied.

HMRC are seeking views on how the changes could interact with existing regimes, such as the corporate interest restriction rules and transfer pricing requirements, and whether any groups or types of transactions would require different treatment.

• The consultation also considers whether similar simplifications could be applied to other types of cross-border payments subject to withholding tax. 

Overall, the consultation is focused on modernising the administrative framework for withholding tax relief on cross-border interest payments, with an emphasis on reducing delays and administrative costs while maintaining the integrity of the tax system. 

The consultation closes on 7 September 2026. Responses can be made by email or post.

Useful guides on this topic

Withholding tax
What is Withholding Tax (WHT)? What are the applicable rates? Are there any exemptions? Can it be reclaimed?

Tax treaties: Links & OECD glossary of terms
What are the UK's Double tax treaties? What are the definitions and common terms used in Double Tax Treaties? Where can I find a glossary?

External link

Simplifying treaty relief from withholding tax on interest paid overseas

 

Question 1: To what extent do the current processes for obtaining treaty relief on interest create delays, costs, or administrative burdens? Which specific aspects cause the most difficulty? Please provide examples or evidence where possible.

Question 2: How well does the current process for obtaining directions in advance of payments of interest allow easy and certain access to treaty relief?

Question 3: Should UK payers of interest to lenders in jurisdictions with whom the UK have a double taxation agreement be permitted to apply treaty relief on interest payments without prior HMRC clearance? What would be the benefits and risks of this?

Question 4: How would moving to self-assessment of treaty relief benefit your business (such as time saved, reduction of fees, cash-flow improvements, greater certainty)?

Question 5: Do you have a view on how interest payers would satisfy themselves that all the requirements for treaty relief are met before applying treaty relief to payments? What experience do you have in other jurisdictions where self-assessment of treaty relief is possible? How well does this work?

Question 6: Should self-assessment of treaty relief only be available where the risk of base erosion is low because the payer is subject to other effective restrictions on interest deductibility? If so, what would be a good basis for a threshold (such as being subject to transfer pricing rules, having net finance costs exceeding the de minimis for Corporate Interest Restriction, being subject to Pillar 2, or some combination of these)?

Question 7: Would it be necessary or helpful to introduce a facility for interest-payers to obtain certainty in advance of paying interest that HMRC agrees treaty relief is available? How might such a facility work? Are you aware of other jurisdictions providing such a facility?

Question 8: Are there other jurisdictions you have experience of where the administrative burden to obtain treaty relief is low, but the regime still provides effective protection against base erosion using interest? What are the requirements in such jurisdictions when paying cross-border interest? How is protection against base erosion achieved (particularly for owner-managed businesses)?

Question 9: Do you have any comments on the potential impacts of these changes on tax receipts or avoidance/evasion behaviour? We are especially interested in how businesses and lenders might respond to changes.

Question 10: What reporting requirements are imposed in other jurisdictions in which you have significant operations/investments?

Question 11: Would it be significantly burdensome to report payments made with complete relief (so that no UK tax is due) in the CT61, alongside payments made without relief or with partial relief? Would it be preferable instead to report them alongside treaty-rated cross-border royalty payments in the CT600H? Why?

Question 12: What sanctions are imposed in other jurisdictions in which you have significant operations/investments?

Question 13: What would be a proportionate but effective set of sanctions for non-compliance in this area? How should this apply in the following circumstances?

• Where treaty relief is applied but the conditions for relief being available are not met.
• Where treaty relief is applied, the conditions for relief are met, but there has been a failure to comply with any requirement in advance of the payment (such as to obtain a certificate of residence or creditor certificate).
• Where treaty relief is applied, the conditions are met, but there has been a failure to comply with reporting requirements after the payment.

Question 14: Are there any other options or ideas for simplifying the withholding process on interest that you believe the government should consider? This could include international examples not mentioned above, or innovative uses of technology or data sharing.

Question 15: Do you have any other comments in relation to changes which could be made to the current system for withholding on payments of interest and how these would impact (positively or negatively) your/your clients’ organisation? This may be in the form of time saved per transaction, reduction in fees or cash flow.