Simplifying Treaty Relief from Withholding Tax on Interest Paid Overseas

HMRC has published a consultation seeking views on potential changes to the administration of treaty relief from the UK’s withholding tax (WHT) regime on payments of interest to overseas lenders (overseas interest payments). WHT on other payments is outside the scope of the consultation.

The consultation proposes options to simplify or reform the current regime, including the possibility of allowing UK borrowers making overseas interest payments to apply treaty relief at source on a self-assessment basis, without HMRC direction, where the borrower believes the conditions for treaty relief are met.

The consultation will close on 7 September 2026. Following the consultation, the government will analyse stakeholder feedback and publish a summary of responses.

Background

The UK provides relief from WHT in respect of many overseas interest payments, including through the UK’s network of Double Tax Treaties (DTTs), which often reduce or remove the UK’s taxing rights over payments of interest to residents of the treaty partner jurisdiction.

Treaty relief from WHT on overseas interest payments is not automatic. Depending on the method for claiming relief under the applicable DTT (i.e. the certified method using Form DT Company or the Double Taxation Treaty Passport Scheme), the overseas lender or the UK borrower must apply for and obtain a direction from HMRC before the interest can be paid with a reduced (or zero) rate of WHT.

Until HMRC grants this direction, the UK borrower must deduct at the basic rate of income tax and return the sums deducted to HMRC. If there has been such deduction, the overseas lender may then submit a claim for a refund of tax from HMRC if they are entitled to relief under the relevant DTT. While this eventually provides relief, it generally results in a cash-flow disadvantage, relies on a valid claim being made, and increases administration for lenders and HMRC.

HMRC’s consultation considers potential reforms to the administrative requirements relating to WHT on overseas interest payments, with the aims of reducing unnecessary burdens, simplifying the tax system and making it more efficient, while safeguarding policy objectives and protecting the UK tax base.

HMRC concessionary treatment

HMRC has in the past operated concessionary treatment under which tax that would otherwise be assessed on the UK borrower 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 overseas lender under the terms of a DTT. Operation of this concession is currently paused while the underlying policy and conditions are reviewed.

The operation of this concession, and its subsequent suspension, are not within the scope of the consultation, which does not seek views on whether the concession should be reinstated or modified. However, the concession provides relevant context for the government’s consideration of whether treaty relief on overseas interest payments could be simplified.

Proposals for reform

The consultation invites views on potential approaches to simplifying treaty relief, including streamlining the process for HMRC directions or allowing UK borrowers to self-assess treaty relief at source, at their own risk, where the conditions for relief are considered to be met. The government is seeking views on the merits, risks and practical impacts of these options, with the aim of delivering meaningful simplification in a revenue-neutral manner.

The consultation seeks views on appropriate safeguards, reporting requirements and sanctions for misapplication or non-compliance with reporting obligations. The consultation notes that effective reporting would need to be balanced against the risk of duplicating obligations on businesses.

Next steps

Affected businesses should review the proposals and consider responding to the consultation. They should also closely monitor any future developments in this area.

The Eversheds Sutherland tax team is preparing a response to the consultation, which clients are welcome to feed into. If you are a client of the Eversheds Sutherland tax team, please provide any comments to your usual contact by 21 August 2026. 

For more information on treaty relief from withholding tax, please get in touch with any of the Eversheds Sutherland contacts below.