What payments are subject to UK withholding tax?

UK withholding tax (20%) applies to yearly interest, royalties, and certain property income paid to non-UK recipients. Dividends are generally not subject to UK withholding tax, but there are exceptions. UK withholding tax (also known as 'income tax deducted at source') applies to certain cross-border payments: (1) Yearly interest — interest on loans or debt with a term of more than one year, paid to non-UK residents. The standard rate is 20%. (2) Royalties — payments for the use of, or the right to use, intellectual property (patents, trademarks, copyrights, know-how), paid to non-UK residents. The standard rate is 20%. (3) Property income — certain property income paid to non-UK residents. (4) Dividends — UK dividends are generally NOT subject to UK withholding tax. However, dividends from UK REITs (Real Estate Investment Trusts) are subject to 20% withholding tax. The withholding tax must be deducted by the UK payer, accounted for to HMRC, and the net amount paid to the non-UK recipient. The recipient can then claim double taxation relief in their country for the UK tax deducted. Relevant legislation: ITA 2007, Sections 874-876 (interest); ITA 2007, Sections 910-914 (royalties); FA 2011 (property income). Example: A UK company pays £100,000 of yearly interest to an overseas lender. The UK company must deduct 20% withholding tax (£20,000), pay £80,000 to the lender, and account for the £20,000 to HMRC. The lender can claim double taxation relief in their country for the £20,000 UK tax. Common mistake: Assuming that dividends are always subject to withholding tax. UK dividends are generally not subject to UK withholding tax (unlike many other countries).

How can I reduce withholding tax using a double taxation treaty?

Double taxation treaties can reduce or eliminate the withholding tax rate. The recipient must claim the reduced rate by providing a certificate of residence to the UK payer. The specific rate depends on the treaty with the recipient's country. Double taxation treaties can reduce or eliminate the rate of UK withholding tax on interest and royalties. The process for claiming the reduced rate: (1) Check the treaty — determine the treaty between the UK and the recipient's country, and find the reduced rate for the relevant type of payment. For example, the UK-US treaty provides for 0% withholding on interest and royalties. (2) Obtain a certificate of residence — the recipient must obtain a certificate of residence from their country's tax authority, confirming that they are resident in that country. (3) Provide the certificate to the UK payer — the recipient provides the certificate of residence to the UK payer, who can then apply the reduced treaty rate. (4) Apply the reduced rate — the UK payer deducts withholding tax at the reduced treaty rate (or 0% if the treaty provides) and accounts for it to HMRC. (5) File the return — the UK payer reports the payment and the reduced rate on the CT61 return. The treaty relief must be actively claimed — without a certificate of residence, the UK payer must deduct at the full 20% rate. Relevant legislation: TIOPA 2010, Sections 2-9 (treaty relief); specific UK bilateral treaties. Example: A UK company pays £100,000 of interest to a US lender. Under the UK-US treaty, the withholding rate on interest is 0%. The US lender provides a certificate of residence from the IRS. The UK company applies the 0% treaty rate and pays the full £100,000 to the lender, with no withholding tax deducted. Common mistake: Not obtaining a certificate of residence before making the payment. Without the certificate, the UK payer must deduct at the full 20% rate, even if a treaty provides for a lower rate.

What exemptions are available from UK withholding tax?

Exemptions include: quoted Eurobond interest, bank deposit interest, short interest (under 1 year), interest paid to UK companies, and certain treaty exemptions. These can eliminate the withholding tax obligation. Several exemptions can eliminate the UK withholding tax obligation: (1) Quoted Eurobond exemption — interest on bonds listed on a recognised stock exchange is exempt from withholding tax, regardless of the recipient's residence. (2) Bank deposit exemption — interest on deposits with UK banks and building societies is exempt from withholding tax when paid to non-UK residents. (3) Short interest — interest on loans with a term of less than one year is not 'yearly interest' and is not subject to withholding tax. (4) Interest paid to UK companies — interest paid to UK-resident companies is not subject to withholding tax (they account for the tax through their corporation tax return). (5) Treaty exemptions — certain treaties provide for 0% withholding on specific types of payments (e.g., the UK-US treaty provides for 0% on interest). (6) Other exemptions — there are additional exemptions for specific types of payments, such as interest on government securities and interest on certain regulated financial transactions. The exemptions can significantly reduce or eliminate the withholding tax obligation, but the conditions must be met precisely. Relevant legislation: ITA 2007, Sections 874-876 (withholding tax exemptions); ITA 2007, Section 879 (quoted Eurobonds); ITA 2007, Section 881 (bank deposits). Example: A UK company issues bonds listed on the London Stock Exchange and pays interest to overseas bondholders. The interest qualifies for the quoted Eurobond exemption — no withholding tax is deducted, regardless of the bondholders' residence. Common mistake: Not checking whether an exemption applies before deducting withholding tax. Many cross-border payments qualify for an exemption, and unnecessary withholding can cause cash flow issues for the recipient.

What is a CT61 return and when is it required?

A CT61 return is the form used by UK companies to account for income tax deducted at source (including withholding tax on interest and royalties). It must be filed quarterly, within 14 days of the end of each quarter. The CT61 return is the form used by UK companies to account for income tax deducted at source from cross-border payments (interest, royalties, and other payments subject to withholding tax). Key requirements: (1) Filing frequency — the CT61 return is filed quarterly, covering the periods ending 31 March, 30 June, 30 September, and 31 December. (2) Filing deadline — the return must be filed within 14 days of the end of each quarter (i.e., by 14 April, 14 July, 14 October, and 14 January). (3) Payment — the tax deducted must be paid to HMRC by the same deadline. (4) Certificate to recipient — the UK payer must provide the recipient with a certificate showing the amount of tax deducted, within 14 days of the end of the quarter. (5) Content — the return shows the total payments made, the tax deducted, and the net amounts paid to recipients. The CT61 return is required for any quarter in which tax has been deducted at source. If no tax has been deducted in a quarter, no return is required for that quarter. Relevant legislation: ITA 2007, Section 960 (CT61 returns); Income Tax (CT61 Returns) Regulations 2003. Example: A UK company deducts £10,000 of withholding tax from interest payments in the quarter ending 30 September. The company must file a CT61 return and pay the £10,000 to HMRC by 14 October. The company must also provide the recipient with a certificate showing the £10,000 deducted. Common mistake: Not filing the CT61 return on time. The quarterly deadline (within 14 days of the quarter-end) is strict, and late filing can result in penalties.

Who is liable if withholding tax is not deducted correctly?

The UK payer is liable for the withholding tax if it is not deducted correctly. The UK payer must pay the tax that should have been deducted, plus interest and potential penalties, even if the recipient has already received the gross amount. If UK withholding tax is not deducted correctly, the UK payer is liable for the tax. Key points: (1) Payer's liability — the UK business making the payment is responsible for determining whether withholding tax applies, calculating the amount, deducting it, and accounting for it to HMRC. If the UK payer fails to deduct the correct amount, they are personally liable for the shortfall. (2) Recovery from the recipient — the UK payer can recover the tax from the recipient (by deducting it from future payments or seeking repayment), but this is often difficult in practice, especially if the recipient is overseas. (3) Interest and penalties — HMRC will charge interest on the unpaid tax from the due date, and may impose penalties for the failure to deduct. (4) Treaty relief — if the recipient would have qualified for a lower treaty rate, the UK payer can make a retrospective claim to reduce the liability. However, the recipient must have been resident in the treaty country at the time of the payment. To avoid liability, UK businesses should ensure they have robust processes for determining whether withholding tax applies, obtaining certificates of residence, and deducting the correct amount. Relevant legislation: ITA 2007, Sections 874-876 (payer's liability); TMA 1970 (interest and penalties). Example: A UK company pays £100,000 of interest to an overseas lender without deducting the 20% withholding tax. HMRC determines that withholding tax should have been deducted. The UK company is liable for £20,000 of tax, plus interest from the due date, plus potential penalties. The company can try to recover the £20,000 from the overseas lender. Common mistake: Assuming that the liability for withholding tax falls on the recipient. The UK payer is liable, and HMRC will pursue the UK payer for the tax, interest, and penalties.

International Tax › Corporate

Withholding Tax on Cross-Border Payments

UK withholding tax applies to certain cross-border payments (interest, royalties, and some dividends). Understand the rates, treaty reductions, exemptions, and compliance requirements.

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Withholding tax is a tax deducted at source from certain cross-border payments. The UK requires withholding tax on payments of yearly interest, royalties, and some dividends to non-UK recipients. Double taxation treaties can reduce the rate, and exemptions are available in certain circumstances. Understanding the withholding tax rules is essential for businesses making cross-border payments.

What Is Subject to Withholding Tax

UK withholding tax applies to: (1) Yearly interest — interest on loans with a term of more than one year, paid to non-UK recipients. (2) Royalties — payments for the use of intellectual property, paid to non-UK recipients. (3) Property income — certain property income paid to non-UK recipients. Dividends are generally not subject to UK withholding tax, but there are exceptions. The standard rate of UK withholding tax is 20%.

Treaty Reductions

Double taxation treaties can reduce the rate of withholding tax. For example, the UK-US treaty reduces the withholding rate on interest to 0% and on royalties to 0%. The recipient must claim the reduced rate, typically by providing a certificate of residence to the UK payer. The specific rates depend on the treaty with the recipient's country.

Exemptions

Several exemptions can eliminate the withholding tax obligation: (1) Quoted Eurobond exemption — interest on listed bonds. (2) Bank deposit exemption — interest on bank deposits with UK banks. (3) Short interest — interest on loans with a term of less than one year. (4) Treaty exemptions — certain treaties provide for 0% withholding on specific types of payments. The exemptions can significantly reduce or eliminate the withholding tax obligation.

Compliance and Reporting

UK businesses making cross-border payments must: (1) Determine whether the payment is subject to withholding tax. (2) Apply the correct rate (including any treaty reduction). (3) Deduct and account for the withholding tax to HMRC. (4) File the appropriate returns (CT61 for companies). (5) Provide the recipient with a certificate of tax deducted. Non-compliance can result in the UK business being liable for the tax that should have been deducted, plus penalties and interest.

Key Points

What You Need to Know

UK withholding tax applies to yearly interest and royalties paid to non-UK recipients
The standard rate is 20%, but treaties can reduce or eliminate the rate
Dividends are generally not subject to UK withholding tax
Exemptions include quoted Eurobonds, bank deposits, and short interest
Non-compliance can make the UK payer liable for the tax, plus penalties

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