HMRC’S INTM413205 and the end of easy fixes for UK interest withholding tax failures

Full tax and interest are now at risk for UK borrowers paying interest.

UK borrowers paying interest to overseas lenders face important obligations under UK tax rules, particularly regarding withholding tax (WHT) on interest payments. This article explores the general framework, the role of HMRC’s International Manual INTM413205, the recent pause on a long-standing concession, and the resulting implications for UK borrowers—including cash flow impacts.

The basics of UK Withholding Tax on Interest

Under UK domestic law, UK companies (borrowers) must generally deduct income tax at the basic rate, currently 20%, from payments of UK-source yearly interest made to non-UK resident lenders. This withheld amount is then paid over to HMRC.

Exceptions exist, such as for short-term interest, certain bank loans, quoted Eurobonds, or private placements. However, where a double taxation agreement (DTA) between the UK and the lender’s country provides for a reduced rate or exemption (often allowing payment gross or at 0%), relief is available but only with prior HMRC authorisation.

Borrowers typically apply for this via the Double Taxation Treaty Passport (DTTP) scheme or a standalone clearance application. Once HMRC issues clearance, payments can be made gross (or at the reduced rate).

The previous concessionary approach

Historically, HMRC operated a pragmatic concession (detailed in INTM413230) for cases where a UK borrower paid interest gross to a treaty-entitled overseas lender before obtaining HMRC clearance. If the lender was ultimately entitled to relief, the borrower could make a voluntary disclosure to HMRC. In qualifying cases, HMRC would assess only late-payment interest (currently around 7.75% per annum, subject to change) rather than the full 20% withholding tax plus penalties and interest.

This approach recognised the administrative timing gap that the tax was technically due but would be immediately repayable to the lender via a treaty claim. The borrower faced only the interest cost on the delayed payment, avoiding a full cash outflow for tax that would later be refunded.

HMRC’s pause on the concession – INTM413205

In late 2025, HMRC updated its International Manual with new guidance at INTM413205. This announces a temporary pause on processing certain disclosures related to withholding failures on interest payments overseas, while HMRC reviews its processes and guidance, particularly how DTA relief interacts with statutory withholding rules.

Key points from the update:

• HMRC has suspended the concessionary treatment (interest-only assessments)
• It has stopped processing voluntary disclosure reports of withholding failures, related repayment claims, and requests for interest-only settlements
• Disclosures remain mandatory, but failures now risk assessment for the full underlying withholding tax (20%) plus late – payment interest – and potentially penalties
• This applies even where the overseas lender is treaty-entitled to gross or reduced-rate payment
• Future treaty clearance applications (e.g., via DTTP) continue unaffected
• HMRC has preserved access for certain older years: voluntary disclosures or concession applications made before 5 April 2026 may still qualify for the old treatment for periods like 2021-22, despite normal time limits, in case the concession is reinstated post-review

The pause is indefinite until HMRC completes its review and updates the manual accordingly.

Impact on UK borrowers – including cash flow costs

This change significantly increases risk and potential costs for UK borrowers with cross-border loans, especially those relying on treaty relief but facing delays in HMRC clearance.

How Gravita can assist

Gravita can support businesses handle these changes.

At Gravita, our specialist tax team supports ambitious businesses with complex cross-border tax matters, including UK withholding tax compliance.

We can help by:

• Reviewing your current and historical interest payments to overseas lenders for compliance risks.
• Assisting with DTTP or standalone HMRC clearance applications to secure gross payment authorisation promptly.
• Advising on voluntary disclosures (where still relevant) and strategies to mitigate exposure during the pause.
• Providing guidance on cash flow planning, gross-up provisions, and treaty claim processes.

What next?

If your business makes interest payments to overseas lenders, please contact  Fiona Cross, Corporate and International Tax Parter  for tailored advice on navigating these changes.