For a while now, HMRC have been pondering what to do about the situation where a UK-based borrower doesn’t deduct withholding tax (WHT) on interest paid to overseas lenders, and if the situation had been handled correctly, the WHT would have been removed or reduced under a double taxation agreement (DTA).
The reason for the head scratching can be traced all the way back to the reintroduction of income tax in 1842, specifically ITA 1842 s 102 (or Section CII of an Act for granting to ‘Her Majesty Duties on Profits arising from Property, Professions, Trades, and Offices, until the Sixth Day of April One thousand eight hundred and forty-five 5th & 6th Victoria’ to give it its proper title), when the requirement for the payer to deduct tax from interest was introduced.
We then move on to two other provisions, claims for double taxation relief (DTR) and the ability for HMRC to raise extended time limit assessments and the fact that the three provisions do not actually work together.
Looking first at extended time limit assessments. Where HMRC make these, the assessed person is able to make any claims for relief they would have been able to make had this all happened at the correct time. For example, someone has foreign profits and did not declare the income in the UK, but paid tax overseas. When HMRC raise the assessment to collect the UK tax due, the taxpayer is able to claim DTR as they would have been able to normally.
However, although the UK resident is liable to pay the WHT to HMRC for interest paid abroad, the claim under the relevant DTA is made by the lender who is not actually charged to tax. Therefore, the extra time allowed to claim DTR when an extended time limit assessment is made does not apply as the wrong person has to make the claim!
This is clearly just an unintended mismatch in the legislation and is arguably open to a claim under the Mutual Agreement Procedure in a DTA, but HMRC have come up with a partial solution: allow the payer to make the DTR claim instead.
They can do this because when you look at the enabling legislation, TIOPA 2010 s 6(6), it just says that for relief under a DTA a claim is needed, not who actually needs to make the claim. Then it is up to HMRC to set out how the claim is to be made. However, they appear to have missed the final step in their new guidance for putting non-deduction right, in that it still only refers to in-date claims, not the ability to claim relief where extended time limit assessments are made.
So, credit where it’s due. Plaudits for spotting a neat solution to the problem, and let’s hope HMRC take it to the logical conclusion and allow the practice for all cases.
Home >Articles > Interest withholding tax: a partial solution
Interest withholding tax: a partial solution
Credit where it’s due.
For a while now, HMRC have been pondering what to do about the situation where a UK-based borrower doesn’t deduct withholding tax (WHT) on interest paid to overseas lenders, and if the situation had been handled correctly, the WHT would have been removed or reduced under a double taxation agreement (DTA).
The reason for the head scratching can be traced all the way back to the reintroduction of income tax in 1842, specifically ITA 1842 s 102 (or Section CII of an Act for granting to ‘Her Majesty Duties on Profits arising from Property, Professions, Trades, and Offices, until the Sixth Day of April One thousand eight hundred and forty-five 5th & 6th Victoria’ to give it its proper title), when the requirement for the payer to deduct tax from interest was introduced.
We then move on to two other provisions, claims for double taxation relief (DTR) and the ability for HMRC to raise extended time limit assessments and the fact that the three provisions do not actually work together.
Looking first at extended time limit assessments. Where HMRC make these, the assessed person is able to make any claims for relief they would have been able to make had this all happened at the correct time. For example, someone has foreign profits and did not declare the income in the UK, but paid tax overseas. When HMRC raise the assessment to collect the UK tax due, the taxpayer is able to claim DTR as they would have been able to normally.
However, although the UK resident is liable to pay the WHT to HMRC for interest paid abroad, the claim under the relevant DTA is made by the lender who is not actually charged to tax. Therefore, the extra time allowed to claim DTR when an extended time limit assessment is made does not apply as the wrong person has to make the claim!
This is clearly just an unintended mismatch in the legislation and is arguably open to a claim under the Mutual Agreement Procedure in a DTA, but HMRC have come up with a partial solution: allow the payer to make the DTR claim instead.
They can do this because when you look at the enabling legislation, TIOPA 2010 s 6(6), it just says that for relief under a DTA a claim is needed, not who actually needs to make the claim. Then it is up to HMRC to set out how the claim is to be made. However, they appear to have missed the final step in their new guidance for putting non-deduction right, in that it still only refers to in-date claims, not the ability to claim relief where extended time limit assessments are made.
So, credit where it’s due. Plaudits for spotting a neat solution to the problem, and let’s hope HMRC take it to the logical conclusion and allow the practice for all cases.
