In this week’s Q&A, Isabella Wilson, adviser at Croner VIP Tax Team, explains the tax implications for a failure to withhold income tax on foreign interest payments
Q: My client is a UK company paying yearly interest to an overseas lender. What are the tax implications in the case of a failure to withhold income tax?
A: When a UK company makes a payment of yearly interest to an overseas lender, generally income tax at the basic rate for the relevant tax year must be deducted at source by the company, as set out in section 874, Income Tax Act 2007 (ITA 2007).
Where there is a double taxation agreement (DTA) between the UK and the lender’s country of residence, the lender may either be entitled to an exemption from UK income tax or a reduced rate of income tax on the interest received.
In this case, when HMRC grants clearance, the company will be able to pay the interest gross to the lender.
