UK and International Tax news

Tax Update 2026: Simplifying Treaty Relief from WHT on Interest

Thursday 30th July 2026

HMRC has published a consultation seeking views on whether and how the administration of treaty relief from the UK’s withholding tax regime on payments of interest to overseas lenders could be simplified or reformed whilst maintaining effective protection against profit-stripping.

The consultation presents a range of potential approaches and invites views from stakeholders on their relative merits, risks, and practical impacts.

Within the current rules, companies and certain other persons paying interest have an obligation to deduct from those payments an amount representing income tax at the basic rate. Broadly, ‘yearly interest’ (generally interest arising on a debt capable of lasting a year or more) is within the rules, whereas ‘short interest’ (on loans of less than a year) is not. The rules most commonly apply in two scenarios:

  • when a UK company (or local authority or partnership including a company) pays interest to an individual or other non-corporate lender
  • when interest is paid to any person whose usual place of abode is outside the UK

It is the second category, interest payments from UK payers to overseas payees, which are the subject of this consultation

The UK’s wide network of Double Taxation Agreements can often reduce or remove the UK’s taxing rights over payments of interest to residents of the treaty partner. However, treaty relief from interest withholding is not automatic.

The overseas recipient (or in some circumstances the UK payer) must apply for and obtain a direction from HMRC before the interest can be paid with a reduced or zero rate of withholding. Until HMRC grants this direction, the UK payer remains obligated to deduct at the basic rate of income tax and return the sums deducted to HMRC. The payee may then submit a claim for a refund of tax from HMRC if they are entitled to relief under the relevant treaty. While this eventually provides relief, it generally results in a cash-flow disadvantage, relies on a valid claim being made, and increases administration for both the lender and HMRC.

To ensure that treaty benefits are only conferred in appropriate circumstances, and that HMRC has an appropriate level of visibility over cross-border income flows, the processes to claim treaty relief on a payment of interest involve several steps by both parties to the payment.

Relief is generally claimed using the DT-Company or DT-Individual forms which require details of the payment, the payee, and the underlying DTA.

Once received, HMRC may issue a direction permitting future payments be made at the treaty rate or gross for a period of five years, subject to certain events.

These processes may be expedited by the operation of the Double Taxation Treaty Passport scheme, under which overseas corporate lenders can apply for a ‘treaty passport’. Once granted, the process to permit the UK payer to withhold at the treaty rate is streamlined, although HMRC direction is given on a loan-by-loan basis.

HMRC has also operated concessionary treatment by which tax which otherwise would be assessed on the UK payer following a failure to operate the withholding process is not pursued to the extent that it is clear that any tax collected would be repaid to the lender under the terms of a DTA. Operation of this concession is currently paused whilst the underlying policy and conditions are reviewed.

The operation of the concession, and its subsequent pause, are not within the scope of this consultation, and the consultation does not seek views on whether that concession should be reinstated or modified. However, the experience of the concession, and the issues arising following its pause, provide relevant context in illustrating some of the underlying administrative challenges and risks within the current system, particularly where relief is available in principle but difficult to obtain in practice. This context has informed the government’s consideration of whether there is scope to simplify the design and administration of treaty relief on payments of interest.

In summary, the current system in relation to treaty relief involves a requirement to withhold tax unless advance clearance is obtained. However, not all interest payments are subject to withholding. Various categories of interest are exempt under domestic law, such as interest paid by banks and building societies in the normal course of business. Such exclusions are not the focus of the consultation.

Stakeholders have raised concerns that the current process can result in delays, administrative complexity, uncertainty and unnecessary cash-flow impacts. In many cases, initial withholding is required even where relief is ultimately available, resulting in complexity and administrative repayment processes with limited Exchequer benefit.

HMRC is seeking responses to 15 questions in the consultation which runs from 13 July to 7 September 2026.

 

If you would like more detail on the above, please contact Keith Rushen on 0207 486 2378.

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