HMRC recently launched a consultation aimed at simplifying the process for claiming treaty relief from withholding tax on interest. The consultation focuses on administration rather than changes to the underlying availability of relief. However, while framed as a simplification measure, the proposals could be seen as a shift of responsibility from HMRC to taxpayers.

Why HMRC wants to reform treaty relief

Annual interest paid by UK companies can be subject to withholding tax if the recipient is not also a UK company. For non-resident recipients, relief is often available under the UK's extensive network of double tax treaties, which can reduce the rate, often to zero, where the treaty conditions are met.

Currently, UK borrowers must obtain HMRC clearance before applying a reduced rate. Applications can take months and require evidence of treaty residence together with other information to support the claim. This creates administrative burdens for taxpayers, HMRC, and other tax authorities.

The introduction of the Double Tax Treaty Passport Scheme in 2010 streamlined one aspect of the process by allowing corporate lenders to establish their residence status in advance, but payers still need to obtain clearance before making interest payments.

Recent developments highlight some of the difficulties with the current system. HMRC previously offered concessionary treatment where interest was paid at the treaty withholding tax rate before clearance had been obtained. Under the concession, HMRC applied late payment interest but would not seek to recover the withholding tax, removing the need for a separate treaty claim. HMRC paused the concession in early 2025 while it considered its policy going forward. It has not yet reached a decision and is still not processing associated disclosures.

The UK needs to keep pace with developments elsewhere if it wants to maintain a business-friendly environment. In 2024, the EU Council adopted the FASTER initiative, introducing digital residence certificates with mechanisms allowing relief at source or rapid repayment of excess withholding tax. The European Commission is now proposing further simplification.

HMRC's consultation covers similar ground to the recent EU developments. More broadly, efficient withholding tax procedures are increasingly seen as part of a jurisdiction's overall competitiveness, particularly for internationally mobile investment and financing structures.

What is HMRC proposing?

HMRC’s proposal will allow taxpayers to self-assess entitlement to treaty relief. This is not a new approach – a similar system is used for withholding tax on royalties. The important point to note is that taxpayers will still need to carry out technical analysis and gather evidence before making payments without withholding tax.

HMRC is also considering the penalties that would sit alongside self-assessment, so taxpayers will need to be confident in their analysis before claiming treaty relief. The consultation suggests that penalties could arise for incorrect claims, failure to obtain evidence and failure to notify HMRC. Yet there is little acknowledgement that determining treaty entitlement is often far from straightforward.

Questions around beneficial ownership and treaty anti-avoidance are frequently highly fact-dependent, meaning advisers may reach different conclusions based on the same information. Any penalty regime should recognise the difference between deliberate non-compliance and a reasonable technical judgement that HMRC later disagrees with. Enhanced disclosure requirements may help, but uncertainty remains around how much information taxpayers need to provide to avoid penalties in contentious cases.

HMRC has suggested retaining a clearance route for more complex cases. Unless a pragmatic approach to penalties is established, there is a risk that taxpayers could continue to seek clearances wherever possible, undermining many of the intended benefits of reform.

The consultation reflects HMRC's view that withholding tax prevents profits from being extracted from the UK through excessive debt funding. Many businesses may question how significant that role is given the existing safeguards provided by transfer pricing, the corporate interest restriction and targeted anti-avoidance rules. HMRC has suggested that self-assessment may only be appropriate where some of these protections apply. Designing workable eligibility criteria could prove challenging in practice. HMRC already has access to data and case-specific disclosures. Given this, it should be well placed to screen for cases which it might view as abusive rather than unnecessarily limiting the benefits of a self-assessment regime.

Which businesses are most affected?

HMRC’s proposals may affect multinational groups with cross-border financing arrangements, although some sectors are likely to be affected more than others.

Private equity-backed groups are a good example. Acquisition financing, intra-group debt, and refinancing transactions frequently rely on treaty relief to avoid unnecessary withholding costs. Similar issues arise for infrastructure, real estate, private credit and other alternative investment structures.

Many of these arrangements involve multiple entities, special purpose vehicles and cross-border ownership chains. Questions of treaty residence, beneficial ownership and anti-avoidance provisions can therefore become highly complex. Simplifying the current process could bring significant benefits, but reducing HMRC's upfront involvement also raises questions about what actions taxpayers should take to ensure their treatment is correct.

A step in the right direction

The consultation stresses the importance of protecting the UK tax base and the policy objectives of withholding tax, and there is no guarantee that changes will be made. However, proposals to streamline the process are a welcome development.

A move to a self-assessment regime should allow businesses to move more quickly while reducing the burden on HMRC. Most cases are likely to be fairly straightforward but appropriate disclosures should allow HMRC to make intelligent data-driven decisions and direct resources to the cases where there is genuine risk to the Exchequer.

As responsibility shifts to the taxpayer, any penalty regime should recognise that these questions are not always straightforward and avoid assuming that an error implies carelessness.

Groups who regularly claim withholding tax relief on interest are encouraged to respond to the consultation before the deadline of 7 September 2026. In the meantime, uncertainty remains for many taxpayers with existing arrangements following the withdrawal of HMRC’s concessionary treatment.

If you would like to learn more about HMRC’s proposal, contact Mike Cooper, Stephen Fuller, Faiz Maljee, or your usual RSM representative.

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