Changes of name and business account details during the lifetime of a Double Taxation relief at source Direction
This Guidance Note explains how changes in payer and payee name and business details may affect the validity of an existing Direction for UK payers to make payments of interest/royalties to non-UK residents which incorporate double taxation treaty relief. It sets out the circumstances in which such changes can trigger the need for a fresh application for relief at source from the non-resident.
Under Chapter 3 of Part 15 Income Tax Act 2007 (formerly Sections 349(2) and 536(2) of the Income and Corporation Taxes Act 1988) there is a general obligation on UK payers of interest and royalties to deduct and account for tax at a stipulated rate to HM Revenue & Customs (HMRC).
HMRC Residency has the discretion to give Double Taxation (DT) treaty relief at source by directing, under Regulation 2 of SI 1970 No. 488, a UK payer of relievable income to make subsequent payments either without deducting income tax at the statutory rate, or by deducting an amount specified by reference to the DT treaty appropriate to the country of residence of the payee.
In the absence of a Direction, or where it may be reasonably inferred that an existing Direction has become invalid by reference to the conditions under which it was issued, the UK payer is bound to deduct and account for tax in the normal way. Failure to do so may result in the UK payer being assessed for the tax that should have been deducted from the payments in question and being charged to interest and penalties.
Both the UK payer and the non-resident payee are specifically named and identified, using the information supplied to HMRC Residency in the application for treaty relief.
The Direction itself clearly states that it will 'cease to have effect if ... the recipient of the income changes...' In strictness this means the Direction would become invalid by any change in the name or details, no matter how minor, of the account to which payments are being made by the UK payer.
Whilst HMRC Residency has to fulfill its obligations to protect the UK Exchequer and taxpayer, it seeks to keep the compliance and administrative work required from its customers to a minimum.
Changes in the name and business details of either the UK payer or the non-resident payee may signify a more fundamental change to the basis on which DT treaty relief was authorised in the first place. And this could mean that relief is either no longer available or that the terms under which the Direction was issued must be reconsidered.
The key issue that HMRC Residency must have regard to is whether there has been any change in the underlying beneficial ownership of the income in question, and of the relationship between the beneficial owner(s) and the UK payer, that could prejudice the basis on which treaty relief was initially authorised.
HMRC Residency adopts the following broad tests in deciding what further action is appropriate where there have been changes in the name and business details of either the UK payer or the non-resident payee.
Reasoning: the assumption is that a superficial (and thus non-material) change only has taken place.
Reasoning: the tax office is alerted to any emerging tax consequences for the UK tax base (for example transfer pricing) and can in return flag up any prejudicial elements for the basis of the DT claim (for example a special relationship question). This should identify at an early stage cases where a fresh application for treaty relief is needed, or where the extent or form of the relief must be otherwise re-assessed.
Reasoning: no fresh application is likely to be justified, using the same assumptions as within bullet one above.
Reasoning: the overseas concern that was previously successful in claiming treaty relief has changed in a sufficiently substantial and material way as to justify a re-establishment of that entitlement.
UK payers especially should take careful note of the wording and terms of any SI 1970/488 Direction issued to them in order to understand fully their obligations to deduct tax at the appropriate treaty rate.
Prompt notification of changes of name or beneficial ownership etc. will allow HMRC Residency to give fresh consideration to the terms of the Direction and enable it to issue a new notice where appropriate at the earliest opportunity and so give the UK payer or non-resident payee certainty of treatment.
If you consider that you may be affected by such changes, you should contact HMRC Residency caseworkers immediately, quoting the HMRC Residency 'FD…' reference given on the Direction or used in correspondence with this office.
HMRC Residency helpline: Tel 0845 070 0040 if calling from the UK, or +44 151 210 2222 if calling from outside the UK.
Send an email.
