If your UK business pays interest or royalties to a company based overseas, you are almost certainly in withholding tax territory, whether you realise it or not. Getting this wrong is one of the more common and more expensive mistakes we see at Monx, because the liability sits with you as the payer, not the overseas recipient.
Here is what you need to know to stay compliant and avoid paying tax you did not need to pay.
What UK withholding tax actually is
Withholding tax is not really a separate tax. It is a mechanism by which HMRC collects income tax at source on certain payments leaving the UK, using the UK payer as its collection agent. You deduct the tax before paying your overseas supplier or lender, and hand it over to HMRC on their behalf.
Under UK law, the three payment types most often affected are interest, royalties, and certain property distributions. The standard rate is 20 percent, and this is proposed to rise to 22 percent from 6 April 2027. Notably, the UK does not impose withholding tax on ordinary dividends, which is one of the reasons the UK remains attractive as a holding company jurisdiction.
Interest payments to overseas lenders
If your company pays yearly interest (broadly, interest on loans capable of lasting more than 12 months) to an overseas lender, you must deduct 20 percent UK income tax at source. This catches a lot of UK subsidiaries that take loans from overseas parent companies, as well as private placement arrangements and intra-group financing structures.
There are limited exceptions. Short interest (on loans not capable of running beyond a year), quoted Eurobonds, and payments by qualifying asset holding companies can sit outside the charge. Banks paying interest on ordinary deposits also have specific rules. Outside those carve outs, the default position is that you withhold, and you keep withholding until HMRC tells you otherwise in writing.
Royalty payments to foreign companies
Royalties paid from the UK for the use of patents, copyrights, trademarks, designs, know-how, secret processes and similar rights are also subject to 20 percent withholding tax when paid to an overseas recipient. This is a live issue for UK businesses licensing software, paying franchise fees, or buying the right to use branded content from a foreign owner.
Royalty withholding works slightly differently from interest withholding in one important respect. You are permitted to apply a reduced treaty rate of withholding yourself, without waiting for HMRC clearance, provided you reasonably believe the overseas recipient qualifies for treaty relief. This is called self assessment of treaty relief. It is faster, but the risk of getting it wrong sits entirely with you, so many businesses still apply for a formal direction from HMRC for certainty, particularly ahead of a sale or investment round.
Treaty relief
The UK has one of the largest double taxation treaty networks in the world, with over 130 treaties in force. Most of them reduce the 20 percent rate substantially, often to 0, 5, or 10 percent, depending on the country and the type of payment. For a UK company paying royalties to a qualifying US recipient, for example, the treaty rate is typically zero. Same story for many European jurisdictions.
However, treaty relief is not automatic. This is the single most common mistake we see. The overseas recipient has to make an application to HMRC, usually on the consolidated online DT-Company form, which replaced the jurisdiction specific paper forms a couple of years ago. HMRC then issues a direction to the UK payer authorising payment at the treaty rate, or gross where the treaty eliminates withholding altogether.
Until that direction arrives, you must withhold at 20 percent. Any overpayment is recoverable later, but the process can take months, which is painful for cashflow and often soured by currency movements in the meantime.
The Double Taxation Treaty Passport Scheme
For overseas corporate lenders who make multiple UK loans, the Double Taxation Treaty Passport Scheme (DTTP) offers a much smoother route. The lender applies once using form DTTP1 to become a passport holder. UK borrowers then notify HMRC of each new loan using form DTTP2, and HMRC issues a direction allowing interest to be paid at the reduced treaty rate without going through a full fresh clearance each time. If your group regularly borrows from the same overseas lender, this is worth setting up.
Brexit changed the landscape
Until 2021, intra group payments of interest, royalties, and dividends within the EU were largely sheltered from withholding tax by the EU Interest and Royalties Directive and the Parent Subsidiary Directive. Those directives no longer apply to UK companies. If you have EU group members, you now rely purely on the relevant bilateral treaty, and you need to check whether paperwork that was previously unnecessary now needs to be filed. A payment from a UK subsidiary to an Italian parent, for instance, moved from being directive exempt to needing Italy-UK treaty relief. Many groups have still not updated their processes.
What you need to do in practice
If your business makes any cross border interest or royalty payments, we recommend the following baseline steps:
- Identify every recurring payment leaving the UK that could be interest, royalty, or annual payment in nature. Include intercompany loans, licensing arrangements, and IP royalties.
- Check the applicable treaty and confirm the rate that should apply. Do not assume zero because a treaty exists.
- For interest, make sure the overseas recipient has submitted a DT-Company application or holds a treaty passport, and that HMRC has issued a direction before you apply the reduced rate.
- Put the correct CT61 reporting in place. CT61 returns are filed quarterly and are how withheld tax is actually paid to HMRC.
- Keep documentation, certificates of residence, and treaty claim paperwork on file. HMRC can and does challenge positions years after the event.
How Monx can help
Withholding tax on cross border payments is one of those areas where small administrative slips translate directly into real money, whether through unnecessary 20 percent deductions, penalties for failing to account for withheld tax, or delays in recovering tax that should never have been withheld in the first place. Our cross border tax team advises UK businesses on every part of the process, from treaty analysis and HMRC clearance applications through to ongoing CT61 compliance and group restructuring to minimise withholding tax leakage.
If you are making payments overseas and are not entirely sure whether you are getting the withholding tax position right, get in touch. A short review is usually enough to confirm whether your current approach stands up, and where it does not, to put a cleaner structure in place before HMRC asks the question for you.
