An Opportunity To Simplify UK Withholding Tax On Interest

Amongst the draft legislation published on L-Day (13 July 2026), HMRC launched a consultation on simplifying treaty relief from withholding tax on interest paid overseas. Currently, payers of UK-sourced yearly interest are required to deduct income tax at the basic rate – effectively functioning as a withholding tax (WHT) on interest. Administration of the scheme is complex, particularly with regards to the interactions between the UK’s domestic rules and its network of double tax treaties (DTTs).

The consultation shows HMRC’s recognition that the UK’s interest WHT scheme is creaking. As we set out in July 2025 (The trials and tribulations of interest withholding tax), there are three recurring problems practitioners face with the scheme: uncertainty over when UK interest withholding applies, the cumbersome treaty-clearance process, and the absence of a predictable route for borrowers who paid gross in accordance with treaty entitlement but failed to obtain HMRC directions in time. The consultation acknowledges the first two of these issues, but remains silent on the third. 

We welcome HMRC’s suggestion of allowing taxpayers to self-assess whether treaty relief applies. The current system still depends heavily on advance treaty applications and HMRC directions, which may have made sense in the 1970s, when treaty claims involved paper forms, overseas tax authority stamps and manual processing, but is much harder to justify now. Processing times (which in some cases can be over a year) and procedural complexities are frequently a barrier to taxpayers seeking to rely on treaty relief.

Switching to self-assessment for interest WHT is sensible. It already works in adjacent regimes, including royalty withholding, where taxpayers and HMRC manage risk through reporting, audit and anti-treaty-shopping rules. 

Disappointingly, the consultation does not set out an approach to historic compliance. Practitioners have been calling for an update from HMRC on their approach to resolving cases where gross payments have been made (in line with treaties), but the accompanying paperwork has not been filed in time. HMRC guidance currently says the existence of a treaty does not automatically release the payer from the domestic obligation to deduct. It also says withholding tax and late-payment interest can be due even if HMRC does not raise an assessment. That leaves taxpayers trying to regularise historic positions in an unsatisfactory limbo: they may have no substantive tax exposure because the lender was treaty-entitled, but still face uncertainty over assessments, interest, concessions and process. Addressing this should be a priority for HMRC because people trying to correct past compliance issues need to know where they stand.

More fundamentally, there remains a case for reassessing the scheme from first principles. The regime creates cost and uncertainty for ordinary commercial lending where no UK tax is ultimately due. The original policy rationale - policing base erosion through outbound interest - has also been overtaken. The UK does not need a creaking withholding system as its primary backstop against excessive interest deductions.

The consultation is therefore a step in the right direction, but only a modest one. The real test is whether HMRC moves from administrative tinkering to structural reform: self-assessment for treaty relief, a clear settlement route for historic gross-payment cases, and a serious debate about whether interest WHT, in its current form, still earns its keep.

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