Broadly, UK businesses paying interest to overseas individuals and non-bank corporates are required to deduct income tax at 20% and remit this amount to HMRC before making the interest payment.

Where interest is paid to an overseas lender, a DTT between the UK and the jurisdiction in which the lender is tax resident may reduce the amount of UK tax due, potentially to zero

The difficulty is that, regardless of entitlement to treaty relief (i.e. where a DTT is in force between the lender’s country of tax residence and the UK), it is not automatically applied and does not allow a UK business to simply apply the reduced rate when making the payment. This contrasts with the approach to payments of royalties whereby a company may self-assess the DTT position and make a royalty payment gross of WHT (or subject to a reduced rate of WHT under a treaty) without prior clearance having been given to HMRC if they reasonably believe at the time the payment is made that relief would be due under a DTT.

Under the existing process, relief generally needs to be claimed via an online form by the overseas lender. This form must then be printed and sent to the tax authority of the lender to stamp the form as proof of tax residency before being sent to HMRC. HMRC will then review and provide the necessary direction before payments can be made at the treaty rate or gross. Overseas corporate lenders may also be able to use the Double Taxation Treaty Passport Scheme to streamline the process, although an HMRC direction is still required for individual loans.

Until the appropriate direction has been given, the UK payer will remain obligated to deduct tax and pay it to HMRC on a quarterly basis, even where the overseas lender is ultimately entitled to treaty relief

This can create additional administration, delays and cash flow implications, with the overseas lender potentially having to reclaim tax that, under the relevant treaty, would have been charged at a reduced or nil rate.

HMRC acknowledges that the existing system can be complex and that the process does not always operate as effectively as it could.

Among the issues identified are delays in obtaining relief, additional administration for businesses, lenders and HMRC, cash flow disadvantages and the potential for uncertainty or error.

The consultation therefore considers whether the treatment of overseas interest payments could be brought more closely into line with the approach used for royalties.

Under one of the proposals, a UK payer could self-assess whether the conditions for treaty relief have been met and apply the appropriate treaty rate at source without waiting for prior HMRC approval.

In practical terms, this could remove an important administrative step for businesses that regularly make interest payments overseas and potentially reduce delays associated with cross-border financing.

While self-assessment could make the process quicker and more straightforward, it would not remove the need to establish that treaty relief genuinely applies.

The payer would need to determine whether the relevant conditions have been satisfied and apply the correct treatment. HMRC would retain the ability to review the position through compliance checks.

The government is therefore also considering what safeguards would be required if the system changed. These could include exclusions from the ability to self-assess in certain circumstances, additional reporting requirements and penalties where relief is applied incorrectly or reporting obligations are not met.

For businesses, the potential trade-off is therefore important: there is less of an administrative burden in that it may not be necessary to obtain advance HMRC clearance, but they remain responsible in accurately assessing the application of the DTT rules to the circumstances surrounding the payment. Under a regime where companies self-assess their DTT position on interest payments, responsibilities would include determining where the overseas lender is actually tax resident and therefore entitled to claim relief under the relevant treaty. This introduces the risk that the lender’s tax residency could be assessed incorrectly or be subject to the anti-avoidance ‘treaty shopping’ rules and, if successfully challenged by HMRC, could result in an error in the self-assessment position of the borrower who should have deducted the appropriate amount of basic rate income tax and remitted it to HMRC.

Not all Treaties apply a 0% rate on interest payments so each individual Treaty would need to be checked and, if there is still a residual rate of withholding tax, the usual process of deducting the tax at this rate and remitting it to HMRC via CT61 forms on a quarterly basis remains.

The proposals are likely to be particularly relevant to UK businesses with overseas lenders, international group funding arrangements or other cross-border financing structures.

Although the consultation is at an early stage, it provides a useful opportunity for businesses to consider how the current withholding tax rules affect their financing arrangements.

This could include reviewing:

• where interest payments are being made overseas and the relevant DTT position;
• whether treaty relief is currently being claimed and how that process is managed, including ongoing monitoring and reassessment of the position where there are extensions or changes to loan facilities or repayment terms as this could necessitate additional treaty relief claims to be made;
• whether the business has appropriate processes and records to support its tax treatment if this became part of self-assessment, in particular around determining the tax residence of lenders and the entitlement to claim treaty relief (often an extremely complex area).

It may also be sensible to consider withholding tax as part of the wider tax and commercial picture when establishing or reviewing international funding arrangements, rather than addressing it only when an interest payment becomes due. One area where this is particularly relevant is in understanding the commercial impact of any gross-up clauses in the loan agreement which, broadly speaking, agree that the lender is entitled to the gross amount of interest regardless of whether there is a requirement to deduct WHT. In this instance, HMRC view the interest payment as being the ‘net of tax’ amount, with the borrower ultimately suffering the cost of the WHT and remitting it to HMRC. Hence the importance of correctly understanding the overall position and each party’s obligations when entering into an interest-bearing loan relationship.

The consultation closed on 7 September 2026. HMRC has stressed that no decisions have yet been taken on whether or how the regime will be reformed.

Now that the consultation has concluded, the government will be able to consider the responses and determine the potential scope and design of any measure. Any Exchequer impact would also be assessed and subject to scrutiny by the Office for Budget Responsibility.

For now, the existing withholding tax and treaty relief requirements continue to apply.

Withholding tax on overseas interest can be easy to overlook when financing arrangements are being put in place, but getting the treatment wrong can create unnecessary tax, administrative and cash flow consequences.

If your business makes interest payments to an overseas lender, is considering new cross-border borrowing or has questions about how the current treaty relief process applies to an existing arrangement, our tax specialists can help you review the position and understand your obligations.

We can also help you consider the wider tax implications of international funding and group structures, ensuring these are considered alongside your broader commercial objectives.

Contact Stephen Martin or Eleanor Drummond in our Corporate Tax team, or talk to one of our advisers to discuss your circumstances.

This article is based on HMRC’s consultation published on 13 July 2026. The proposals remain subject to consultation and the existing rules continue to apply.

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