HMRC Residency - HMRC Residency Double Taxation Guidance Note 1

 

Applications for relief at source on interest payments where both lender and borrower are outside the UK

This Guidance Note explains how HM Revenue & Customs (HMRC) Residency Nottingham handles applications for relief at source from UK income tax under a double taxation treaty in respect of interest payments where both lender and borrower are outside the UK.

Under Chapter 3 of Part 15 Income Tax Act 2007 ( formerly Section 349(2) of the Income and Corporation Taxes Act 1988) there is a general obligation on payers of UK-source interest payments to non-residents to deduct and account for tax at a stipulated rate to HMRC.

The meaning of UK-source in this context will not normally give rise to difficulties. However, where the payer of the interest is not situated in the UK, it may be possible that such payments will fall to be considered under domestic tax law as having a UK-source. The onus is on the payer to decide whether tax is properly to be deducted having regard to settled case law principles and all the facts surrounding the loan. In particular, the payer is advised to make reference to the approach and criteria endorsed by the House of Lords in the National Bank of Greece case (46TC472).

The HMRC position in that case is outlined at SAIM9090 onwards. If the payer concludes that the interest payments fall to be treated as UK-source, and that it is under an obligation to deduct tax, it may be possible that the payee is entitled to make a claim for relief under the double taxation treaty the UK has concluded with its own country of residence. If this is the case, the payee may apply to HMRC Residency for relief from UK tax to be authorised at source. This means that before any interest payments have been made, the payee may be authorised to make those payments gross, without deducting withholding tax, or under a reduced rate of withholding tax. HMRC Residency has discretion to do this by issuing to the payer a Direction under Regulation 2 of Statutory Instrument No. 488 of 1970 (SI 1970/488). Forms on which an application may be made are obtainable from HMRC Residency.

In its consideration of an application for relief at source in such circumstances, HMRC Residency must be satisfied that all the elements necessary to give relief are present. In the circumstance where the payer of the interest is not situated in the UK, HMRC Residency will need satisfactory evidence that the payer has concluded that the payments are to be considered as UK-source and has formed the intention of deducting and accounting for tax accordingly.

HMRC Residency's claim forms ask claimants to attach copies of relevant loan documentation as part of the normal process. In cases such as those discussed in the previous paragraph, HMRC Residency would also ask claimants to enclose supporting evidence confirming the payers' intentions. This could, for example, be copies of pertinent correspondence with the borrower or other relevant documentation.

Without the comfort afforded by such supporting documentation, HMRC Residency may well take the view that it should not exercise its discretion under SI 1970/488 to authorise relief at source.

However, it would then be open to the non-resident payee to make a repayment claim to HMRC Residency once the interest payments have commenced and tax has been deducted. HMRC Residency will be prepared to keep the application for relief at source open and on file pending this eventuality. If the non-resident payee is then able to forward a certificate of tax deducted completed by the payer, HMRC Residency may then be able to accept that the UK source categorisation of the payments has been established. Assuming that all the other conditions for Double Taxation treaty relief are present, HMRC Residency should then be in a better position both to repay the tax deducted and consider in a more positive light the appropriateness of issuing a Direction under SI 1970/488 for future payments.

Contact details

HMRC Residency helpline: Tel 0845 070 0040 if calling from the UK, or +44 151 210 2222 if calling from out side the UK.

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