HMRC consultation on simplifying treaty relief from withholding tax on overseas interest

HMRC recently consulted on simplifying the process for obtaining treaty relief from UK withholding tax on interest paid to overseas lenders. The consultation ran from 13 July to 7 September 2026 and considered several possible reforms, including allowing UK payers to apply treaty relief without obtaining prior HMRC approval.

HMRC has not yet confirmed any changes and will consider the consultation responses before deciding whether and how to reform the current system.

UK businesses paying interest to overseas lenders may need to deduct UK withholding tax at the basic rate of 20%, unless an exemption or a reduced rate under a Double Taxation Agreement applies.

Treaty relief can reduce the rate of UK withholding tax, sometimes to zero. However, businesses generally need HMRC approval before they can apply treaty relief to interest payments.

How does UK withholding tax on overseas interest currently work?

Under UK domestic rules, businesses paying UK-source yearly interest to overseas lenders may need to deduct income tax at the basic rate of 20%. However, exemptions can apply.

The UK has signed Double Taxation Agreements (DTAs) with many countries. Where the relevant conditions are met, a DTA can reduce the rate of UK withholding tax on interest paid to a resident of a treaty country, sometimes to zero.

Treaty relief is not generally automatic. Before the payer can make interest payments at a reduced treaty rate or without withholding tax, the overseas recipient, and sometimes the UK payer, must apply to HMRC and obtain approval.

The current process involves several steps:

• Overseas recipients usually claim treaty relief using either a DT-Company or DT-Individual form. These forms require information about the payer, recipient, interest payment and relevant tax treaty.
• If HMRC accepts the claim, it can issue a direction allowing future interest payments at the reduced treaty rate or without withholding tax, typically for up to five years. The direction may cease to apply if specified circumstances change.
• The Double Taxation Treaty Passport (DTTP) scheme can make the process faster. Overseas corporate lenders can apply for a treaty passport, which simplifies the procedure for obtaining HMRC approval. However, the UK borrower must still obtain an HMRC direction for each loan.

Why is HMRC considering changes to treaty relief?

HMRC recognises that the existing treaty relief rules can be difficult to understand and apply correctly. Businesses may need to complete detailed application forms, obtain supporting documentation such as certificates of tax residence, liaise with overseas counterparties and wait for HMRC approval before applying treaty benefits. This can increase costs and the risk of mistakes, particularly for businesses with multiple cross-border financing arrangements.

Businesses may also experience delays before obtaining treaty relief. In some cases, the UK payer must initially deduct withholding tax even though the recipient ultimately qualifies for full relief under a tax treaty. This can create unnecessary cash flow issues and further administrative work if the overseas lender subsequently needs to reclaim the tax, and many businesses may find complicated.

Which businesses could be affected?

The consultation is particularly relevant to UK businesses that pay interest to overseas lenders. This includes international groups with intercompany financing arrangements, UK businesses borrowing from overseas group companies and businesses using overseas institutional or corporate lenders. Businesses expanding or operating internationally may also encounter these considerations when arranging cross-border finance.

The potential impact will depend on the financing arrangement, the residence of the lender, the relevant Double Taxation Agreement and whether a domestic exemption from UK withholding tax applies.

Businesses should therefore consider each arrangement individually rather than assuming that treaty relief automatically applies.

What changes to treaty relief did HMRC consider?

The consultation considered several possible approaches designed to simplify the system while protecting the UK tax base and maintaining appropriate safeguards against tax avoidance.

Option 1: UK payers self-assess treaty relief

One option would allow UK payers to apply treaty relief immediately, without obtaining prior approval from HMRC, where they believe they meet the relevant treaty conditions.

Under this approach, the UK payer would assess whether relief is available and apply the appropriate withholding tax treatment. HMRC would retain the right to review these decisions through its compliance activity.

This could reduce delays and administrative costs, particularly where entitlement to treaty relief is clear. However, it could also place greater responsibility on UK businesses to establish whether the recipient meets all the relevant treaty conditions.

Option 2: Advance clearance from HMRC

Another potential approach would give businesses access to an advance clearance process where uncertainty exists over whether treaty relief applies.

This could be particularly useful where it is unclear whether relief is available under the relevant tax treaty or where questions arise over whether the recipient meets the conditions required to receive treaty benefits.

Under this approach, UK payers may still need to collect and review evidence, such as certificates of tax residence, to establish that the recipient is resident in the relevant treaty country and qualifies for relief.

Option 3: Reporting through existing compliance processes

A further option considered by HMRC could allow qualifying interest payments to receive full treaty relief without prior HMRC approval, with the payer reporting the payments later through existing withholding tax reporting and compliance processes.

This could give HMRC visibility over the use of treaty relief while reducing the need for upfront approval.

Could UK businesses apply treaty relief without HMRC approval?

Potentially, but the rules have not changed yet.

The consultation considered allowing UK payers to self-assess treaty relief, but HMRC has not confirmed any change. Businesses should therefore continue to follow the existing withholding tax and treaty relief requirements.

If HMRC introduces a self-assessment approach, UK payers could take on greater responsibility for establishing the recipient’s tax residence, checking the relevant Double Taxation Agreement and confirming that the conditions for treaty relief have been met.

What happens next?

HMRC will now analyse the consultation responses before publishing a summary. The Government has not confirmed when it will announce its response or whether it will proceed with any of the options considered in the consultation.

Until HMRC confirms any reforms, businesses making interest payments overseas should continue to follow the existing withholding tax and treaty relief rules.

Businesses with existing or planned cross-border financing arrangements may also want to review whether UK withholding tax applies, whether a domestic exemption is available and whether the relevant Double Taxation Agreement provides a reduced or zero rate.

How Rayner Essex can help with international tax and withholding tax

Cross-border interest payments can involve complex UK tax and treaty considerations. The correct treatment will depend on the nature of the payment, the lender’s residence, the relevant Double Taxation Agreement and the circumstances of the financing arrangement.

Our international tax services can help businesses understand their UK withholding tax obligations, consider the availability of treaty relief and review the tax implications of cross-border financing arrangements.

As a member of INPACT International, we can also work with trusted overseas advisers where advice is required across more than one jurisdiction.

Speak to our international tax team if you are making interest payments overseas or would like to review how the current treaty relief rules apply to your financing arrangements.