Make treaty claims on interest payments

The issue

UK companies often have interest bearing loans from offshore entities. Although as a default position withholding tax is accountable and payable at 20% by the payer, often there will be terms in an appropriate tax treaty which will allow a gross payment to be made. However a point that payers can miss is that a Double Tax Treaty (DTT) rule should not be applied until it has been properly claimed.

When the paying company fails to make a claim it will need to pay the tax and then the overseas company needs to submit a repayment claim to HMRC to claim it back. This might take some time to achieve as there is usually a requirement to obtain certification from the relevant overseas tax authority. If the tax payable is substantial, the delay in obtaining the repayment can have significant cash flow implications for the group as a whole.

Striking a deal with HMRC

In the above circumstances, it is possible to ask HMRC for concessionary treatment to be applied. This means that HMRC effectively ‘calls it quits’ – no tax is physically paid over to HMRC and no repayment is made to the overseas company (although the overseas company does still need to complete a reclaim form). Instead HMRC simply make an assessment to collect any interest on overdue tax (from the date the tax should have been paid to the date of the reclaim). This can significantly improve the group’s overall cash flow.

Final comment

Although this ‘deal’ can be helpful HMRC have no obligation to be co-operative. Furthermore HMRC still ends up charging interest on the unpaid withholding tax which they would not have been able to do if things had been done correctly from the outset. Therefore always consider treaty claims well before any interest needs to be paid!

 

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