The UK Government is consulting on the simplification of the UK withholding tax regime. One of the changes being mooted is a move towards a ‘self-assessment’ style system whereby UK borrowers assess whether the conditions for relief from UK withholding tax are met rather than applying for, and relying on, directions from HMRC to this effect.

Published: 16 August 2026
Author: Thomas Wilkinson & Laura Gould

Background

The UK Government quietly launched a consultation in July 2026 regarding withholding tax on payments of interest made to overseas lenders. The aim of the consultation is to seek views on whether the administration of treaty relief from the UK’s withholding tax (WHT) regime could be simplified without resulting in a loss of tax.

The government acknowledges that the current system can be “costly and challenging to navigate”; we agree with this comment - in our experience, the current system can be complex, costly and time consuming.

The current system

At a high level, where treaty relief is considered to apply, a UK borrower is required to withhold tax at the basic rate (20%) from UK source yearly interest payments made to an overseas lender on account of that overseas lender’s UK tax liability unless HMRC provide directions that the borrower may make a payment to the overseas lender gross of UK WHT (subject to some exemptions).

In practical terms, where an overseas lender is ‘passported’ (i.e., it has a DTTP number), a borrower can submit a DTTP2 application to HMRC requesting directions that interest may be paid gross of UK WHT (or at a reduced rate depending on the terms of the double tax treaty between the UK and the jurisdiction of the relevant overseas lender).  If the lender is not ‘passported’ but is nonetheless entitled to treaty relief in relation to interest payments it receives from a UK borrower, a standard double tax treaty application must be submitted to HMRC before interest can be paid to the overseas lender gross of UK WHT – it can take HMRC many months to process these applications.

Until HMRC issue directions to a borrower that it may pay interest to an overseas lender gross of UK WHT, the borrower is not entitled to make interest payments to an overseas lender without withholding tax at the basic rate, even if it is quite clear that the relevant conditions for treaty relief are met.

This can lead to increased costs for borrowers who are usually required to "gross up" the lender under facility agreements until a direction is received. Where treaty relief is sought, due to the length of time is takes to obtain a direction outside of the DTTP scheme, the first interest payment date may need to be pushed back to enable a borrower to make the payment free of withholding tax. Relying on alternative WHT exemptions may also need to be explored.

In other words, under the current system, HMRC acts as gatekeeper and their advance clearance is required before interest payments may be paid subject to treaty relief.

A move towards borrower ‘self-assessment’?

To simplify the regime, the consultation seeks views on, amongst other things, a move towards a ‘self-assessment’ style system. Under this system, a borrower would assess whether the conditions under the relevant double-tax treaty between the UK and the overseas lender’s jurisdiction are met and, assuming it considers the relevant conditions are met, the borrower could make the interest payment(s) gross of UK WHT to the overseas lender without directions from HMRC.

This would certainly represent simplification for HMRC as they would no longer be required to consider these applications and issue directions to borrowers in response to the same.

In some respects, this would also offer simplification for UK borrowers in that they would likewise no longer be required to deal with the administrative burden of submitting DTTP2 applications to HMRC. However, this would shift a different type of compliance burden onto borrowers as they would need to assess whether they consider, ahead of making an interest payment to an overseas lender, whether the relevant conditions for relief are met such that they can legitimately make these payments gross of UK WHT. If borrowers get that assessment wrong, HMRC could seek the underlying tax which should have been withheld as well as penalties and late payment interest from the borrower.

Additionally, since HMRC are keen to maintain effective reporting requirements “even where no UK tax is payable”, any move to a self-assessment style system would likely see additional reporting requirements for borrowers.

Concessionary treatment where things have gone wrong

As mentioned, HMRC ‘police’ the WHT regime and issue directions providing that borrowers can make interest payments to overseas lenders gross of UK WHT (or at a reduced rate) if they are satisfied that the necessary conditions for relief are met under the relevant double tax treaty between the UK and the overseas lender’s jurisdiction.

Up until recently, HMRC operated a concessionary treatment under which, where interest was paid to an overseas lender gross of UK WHT (or at a reduced rate) without the necessary directions from HMRC, but the conditions for relief under the relevant double tax treaty were met, HMRC would not seek to recover the underlying tax from the borrower and would instead seek to recover only late payment interest and penalties.

This felt like a fair and common-sense approach – after all, HMRC are not ultimately entitled to this tax as the overseas lender’s jurisdiction has taxing rights over the interest pursuant to the double tax treaty. The borrower simply failed to get the necessary directions in place ahead of making the interest payment gross (or at a reduced rate) to the overseas lender.

However, this concession is currently paused and is flagged as being not within scope of the consultation. That is not particularly surprising because if there was a move towards a self-assessment style system, there would be no need for the concessionary treatment.

Either a UK borrower:

• correctly determines that full or partial treaty relief is available and makes the appropriate payment to the overseas lender; or
• incorrectly determines that full or partial treaty relief is available and makes a payment to an overseas lender gross of withholding tax or at a reduced rate. Since this was incorrect and withholding tax was indeed due, the borrower is rightly liable for the UK WHT that should have been withheld – the concessionary treatment would not offer the borrower any forbearance in this scenario in any event.

Conclusion

We agree that the current system is complicated and ripe for simplification – a move towards a ‘self-assessment’ style regime therefore appears to be sensible and there is precedent for this in relation to royalties.

However, this will mean that borrowers will be required to take on the risk of assessing whether the conditions for relief from UK WHT are met – with potentially significant tax liability (as well as interest and penalties) if borrowers get that assessment wrong. Clearly, a borrower’s assessment of the UK WHT position can only be as robust as the information provided to it by the overseas lender in question – naturally, if a ‘self-assessment’ style regime is adopted, loan documentation will have to carefully consider how to allocate risk on this point between borrowers and overseas lenders.

HMRC are clearly nervous about the potential for a loss of tax arising from a simplification of the regime and are consulting on potential safeguards which can be put in place to ensure compliance. There is a delicate balancing act here – if the compliance requirements on borrowers are particularly onerous under any new regime, this will limit the extent to which the UK WHT regime has been simplified and risks swapping one type of administrative complexity for another.

The consultation closes on 7 September 2026 and HMRC's next steps will be watched with interest by banks, private equity sponsors, and multinational groups amongst others.

If you would like to discuss the potential impact of the consultation on your financing arrangements, please contact a member of the Shoosmiths tax team.