HMRC revise approach on ‘interest only' assessments for tax not withheld

HMRC revise approach on 'interest only' assessments

HMRC confirm that they will no longer seek to raise charges for late payment interest on unpaid withholding tax on intra-EU transactions.


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Under UK tax legislation, interest and royalties paid overseas are subject to withholding tax of 20 percent unless treaty clearance is in place or, in the case of royalties only, if the payer reasonably believes that the payee is entitled to relief under a treaty. Where clearance is not in place, the payer is required to report and pay the withholding tax quarterly to HMRC by filing a CT61 return. Where interest or royalty payments have been made to an overseas payee before treaty clearance is obtained and no tax was withheld, HMRC have a long-standing policy of charging late payment interest on the unpaid tax under s87 of the Taxes Management Act (TMA) 1970 in addition to the actual tax due. HMRC have now confirmed that they will no longer seek to raise charges for late payment interest on unpaid withholding tax on intra-EU transactions.

This late payment interest accrues from the date that the tax was due to be paid to HMRC until treaty clearance is granted/the tax is settled. This late payment interest has been charged by HMRC even in cases where under the treaty, no withholding tax would have been due.

As a concession, where HMRC considered that it was clear that the payee had applied for, and had been granted clearance to receive future payments at a reduced or exempt treaty rate; and the payee would be entitled to a repayment of any tax suffered, HMRC would set aside the right to assess and collect the tax and only the TMA70/S87 interest would be sought.

In the Court of Justice of the European Union (CJEU) case C-553/16, the CJEU concluded that Article 56 of the Treaty on the Functioning of the European Union must be interpreted as precluding the charging of irrecoverable default tax on any intra-EU payments of income where the Tax Treaty between the two member states concerned specifies that tax should be withheld either at a reduced rate or be exempt from withholding tax.

As a result of the ruling, HMRC have now conceded that they will not seek to charge late payment interest on withholding tax in scenarios where UK source interest or royalties are paid to a person taxable in an EU member state. Penalties, however, may still be charged for failure to make the CT61 returns under s98 TMA 1970.

Where late payment interest has already been paid to HMRC in respect of interest or royalties paid to a person taxable in another EU member state, this is in contravention of EU law and therefore it should be possible to make a claim for the interest to be repaid. HMRC have not yet announced whether there will be a formal process for making such claims but, as a first step, companies should review their records of what late payment interest, if any, they have paid to HMRC in such cases.

For non-EU transactions there will continue to be no relief or discharge for late payment interest charges. HMRC have not indicated the impact that Brexit may have on HMRC’s power or intent to charge late payment interest on UK-EU transactions after the UK leaves the EU and particularly, after the end of any transition period. We anticipate the guidance will be updated to address this in due course.

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