A person or entity that pays yearly interest arising in the UK must withhold an amount equivalent to income tax at the basic rate (20%) from that interest in certain circumstances, for example, where the recipient’s  “usual place of abode” is outside the UK. Where treaty relief applies under the terms of the relevant double taxation agreement, the rate of withholding may be reduced, including to zero in some cases.

However, treaty relief from interest withholding is not given automatically and the government recognises that the current processes for obtaining treaty relief “can be costly and challenging to navigate”. The government also says  “the complexity of the treaty relief rules can lead to uncertainty and error, with relief not always operating effectively in practice, leading in some instances to disproportionate consequences where mistakes have occurred”.  

Therefore, the government is interested in reforming the treaty relief regime and has published a consultation seeking views on how this could be achieved. Any reform would need to balance “reducing burdens with safeguards” and be delivered in a “revenue neutral manner”.  One option put forward by the government is to allow UK payers to apply treaty relief at source, without prior approval from HMRC, where the payer believes the conditions for treaty relief are met. 

The government is particularly interested in hearing from: 

• organisations that have experience in paying interest overseas and experience of withholding tax in the UK and/or other jurisdictions; and 
• tax advisors with experience of supporting clients through this process.