UK HMRC Pauses Concession on Failures to Withhold Tax on Interest Payments

1. What Happened?

HM Revenue & Customs (HMRC) has paused operation of its long‑standing practice under which, where UK‑source yearly interest was paid gross to a treaty-entitled overseas lender before HMRC clearance was obtained, the borrower, could—upon making a voluntary disclosure—be assessed for late‑payment interest only (see INTM413205).

The concession (at INTM413230) allowed borrowers to make a voluntary disclosure to HMRC if they made interest payments free of withholding tax (a "gross interest payment") to a lender entitled to treaty relief, prior to the receipt of clearance from HMRC. In such cases, HMRC would generally assess only late-payment interest under TMA 1970, section 87, on the basis that the underlying tax was both collectible from the borrower and immediately repayable to the lender.

Now, and until further notice, a failure to withhold means borrowers are at risk of assessment for the underlying withholding tax plus late‑payment interest even where the overseas lender is ultimately treaty-entitled to receive interest payments gross or at a reduced rate.

2. The UK Withholding Tax Rules in Brief

Borrowers must generally withhold UK income tax at the basic rate (currently 20%) from payments of UK‑source yearly interest to overseas lenders and account for it to HMRC. Relief under a double taxation agreement ("DTA") can permit the borrower to make a gross interest payment or pay withholding tax at a reduced rate.

The withholding requirement (subject to that relief and other exemptions) applies to all types of lender—it does not matter whether the lender is (for example) a third-party bank, a third-party credit fund, or a company that is in the same group as the borrower (whether a group finance company or otherwise).

Relief from withholding tax under a DTA first has to be claimed and confirmed by HMRC, following which HMRC issues a direction permitting gross or reduced-rate payment. Until that direction is received, the borrower must continue to withhold. Participation in the United Kingdom's Double Taxation Treaty Passport ("DTTP") scheme is an administrative simplification only and does not remove the requirement to receive a clearance notice from HMRC.

The HMRC concession previously applied where in relation to a gross interest payment:

1. The overseas lender was entitled to relief from UK withholding tax on interest under an applicable double tax treaty, but HMRC had not yet issued a direction permitting gross or reduced-rate payment; and
2. The lender would have been entitled to the repayment of any withheld tax from HMRC under that treaty.

Where the concession applied, HMRC assessed the borrower only for late-payment interest and did not require it to account for the withholding tax itself. In practice, the concession was useful and frequently engaged, as borrowers – often unaware that an HMRC direction was required –have paid interest gross before the direction was obtained, in both intragroup financings and third-party bank lending. HMRC has now paused operation of the concession pending its review of the DTA processes that interact with the statutory withholding rules.

3. Implications

It remains both sensible and consistent with the law to pay interest gross, or at a treaty-reduced rate, only once an HMRC direction authorising payment on that basis has been obtained. That position is unchanged.

However, HMRC's pause of the concession to assess late payment interest only means that the position is now more onerous. In short, unless and until the concession is reinstated, a borrower that paid gross prematurely must account for the basic‑rate withholding tax it ought to have deducted and cannot simply net that amount off against any repayment of tax due to the lender. Instead, repayment claims must be made by the treaty‑entitled lender and any funds then remitted back to the borrower, where possible. Late payment interest under TMA 1970 section 87 will also be payable on the unpaid income tax from the due date until payment.

Historic failures to withhold where no HMRC gross-payment direction was in place have long been a focus of tax due diligence on M&A deals wherever the target group includes borrower entities. That focus will only intensify during the pause, as affected borrowers may face an immediate cash outflow to settle withholding and an additional exposure to late-payment interest. This cost may be mitigated if the lender reclaims the tax and remits it to the borrower, but this requires lender co-operation, which may not be forthcoming or required by the loan documentation (see below).

These cost implications underscore the need for robust administrative safeguards and appropriate drafting in loan documentation. Standard LMA-based provisions typically do not require the lender to reclaim withheld tax and remit it to the borrower in these circumstances. Borrower's counsel may increasingly seek to include such an obligation.

Some loan agreements include a deferral mechanic under which interest payable to a treaty-entitled overseas lender is deferred until a gross-payment direction is in place. This will often be sensible, but the deferral must be actively operated and not overlooked.

Where a borrower cannot temporarily pay gross to a treaty-entitled lender (for example, pending the lender's application for a passport under the HMRC double taxation treaty passport scheme), one route—where available—is to rely on the qualifying private placement (QPP) withholding tax exemption as a short-term measure, with the loan documentation providing for that approach (for example, a pro forma QPP certificate and related provisions). The QPP route is not available where the borrower is connected with the lender (including most intragroup financings). Alternatively, listing the debt on a recognised stock exchange (such as TISE) to access the quoted Eurobond exemption can avoid withholding, though this entails cost and administrative implications and may not be acceptable in all cases.

A final point to note: despite the pausing of the concession, HMRC still expects borrowers to disclose historic failures to withhold without delay, and applications for prospective treaty-rate directions continue to be processed as usual. Moreover, making a disclosure does not stop late-payment interest: interest generally accrues on unpaid tax until it is paid.

HMRC has confirmed in INTM413205 that voluntary disclosures, and applications for the concession to apply, made before 5 April 2026 will keep the 2021-22 tax year within the scope of the voluntary disclosure/concession application notwithstanding the normal four-year assessment time limits, preserving potential access to the concession should it be reinstated. To mitigate risk and maintain flexibility, affected borrowers should act promptly and submit any disclosures and concession applications by 5 April 2026, to ensure that 2021-22 remains in scope.

4. Next Steps

Borrowers should prioritise having HMRC directions in place before interest is paid gross or at a treaty-reduced rate to an overseas treaty-entitled lender.

We would recommend a thorough review of all financing arrangements (including intragroup financing) to ensure compliance with the requirement to withhold and/or obtaining HMRC directions to pay gross.

With their counsel, borrowers should also consider incorporating enhanced contractual protections and the mitigation measures described above into loan documentation.

A common source of difficulty is a change in the lender syndicate shortly before an interest payment date. While a new lender may be treaty-entitled and provide passport details in an assignment agreement or transfer certificate, the borrower must still obtain HMRC clearance (typically via the DTTP2 process) before paying interest gross or at a reduced rate—a step that can be overlooked. Close coordination between the borrower and the facility/paying agent, which often receives documentation from new lenders first, is essential to ensure directions are in place and applied correctly.

Where relevant, borrowers should also consider making a protective disclosure (with any associated concession application) of failures to withhold for 2021-22 by 5 April 2026, for the reasons explained above.