HMRC Residency Double Taxation Guidance Note 8
Relief at source under Double Taxation treaties
This Guidance Note explains what to do when:
- HM Revenue & Customs (HMRC) Residency accepts that treaty relief is available on income paid out of the UK
- and issues a time limited Direction to that effect which then expires
- but the income continues to be paid under the terms of the same contract
- and the recipient of that income wants further payments to be made together with the benefit of Double Taxation (DT) relief.
Background
In some cases UK law requires tax to be deducted from payments made to a non-resident person. A non-resident who qualifies for relief from UK tax under the terms of a DT treaty can claim repayment of all or some of the tax that is deducted - depending on the terms of that treaty.
An application may also be made for relief from UK tax on payments that have yet to be made. Statutory Instrument 1970 Number 488 (SI1970/No488) gives a discretionary power to HMRC which makes it possible for HMRC Residency to issue a Direction to the UK payer of such income.
For as long as there is no change in the material circumstances (see below), the Direction instructs the UK payer that future payments of the specified income are to be made together with the appropriate amount of DT relief.
The standard maximum period for which a Direction is issued is five years, after which time it has no legal effect.
If payments continue to be made after the date on which a Direction expires, the payer is required under UK tax law to deduct and account for tax in the normal way. Failure to do so may result in the tax office that is responsible for the payer requiring tax and/or interest (and possibly penalties) to be accounted for in accordance with the principles explained in the guidance at INTM574030 and INTM574040 of the International Manual.
Procedure
What the non-resident should do
If the non-resident wants to avoid tax being deducted from payments, they should make a fresh application for treaty benefits to HMRC Residency before the expiry date of the previous Direction. The form to use is the standard one, available to download from the website.
The reason that we require a fresh application is to give us all of the information we are likely to need to verify that the non-resident person continues to qualify for treaty benefits.
As an exception to the normal rules, in these cases, the completed form does not need to be certified by the overseas tax authorities. Instead, the form should be sent direct to HMRC Residency together with a covering letter. This covering letter should include an assurance that there has been no material changes to the terms of the contract for which approval of treaty benefits has already been given.
What HMRC Residency will do
Before a fresh Direction is issued, HMRC Residency will normally ask the tax office that is responsible for the payer of the income if there are any reasons to object to treaty relief being given. Examples include objections that are made on the grounds of thin capitalisation or that amounts are not at 'arm's length'.
Subject to tax office agreement, and providing that HMRC Residency is satisfied that the non-resident person continues to qualify for treaty benefits, it will issue a fresh Direction to the payer of the income. The Direction will, in most cases, apply for another five years from the date on which the renewal application for treaty benefits is received by HMRC Residency.
If tax is deducted from payments made after the date on which a direction expires, a claim to repayment of the appropriate amount may be made to HMRC Residency. When tax is deducted after the date on which a renewal application for treaty benefits is sent to HMRC Residency, a claim may be made by letter.
Material circumstances
If there are any material changes to the terms of a contract, a Direction that has been issued to the UK payer automatically ceases to have effect and a fresh claim for treaty benefits must be made.
HMRC Residency DT Guidance Note 2 contains information about what to do if, following the issue of a Direction, changes take place to the name and/or business details of either the payer or payee.
Contact details
HMRC Residency helpline: Tel 0845 070 0040 if calling from the UK, or +44 151 210 222 if calling from outside the UK.
Send an email.
