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21/06/24

UK Withholding Tax

UK Withholding Tax
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Our Tax & HMRC Team represents taxpayers in various types of indirect tax and direct tax disputes and investigations with HMRC. One such area is tax investigations and disputes arising from the duties imposed by Withholding tax (‘WHT’).

Withholding tax is imposed by the Government on paying parties when accounting for income earned by non-residents. It is not a separate tax like VAT or PAYE; but a mechanism for collecting income tax at the source from the payer, often interest, rather than raising an Assessment on the recipient. Effectively, the authorities collect income tax by delegating the accounting responsibility to the payer.

Section 946 of the Income Tax Act 2007 (‘the Act’) outlines when a UK resident company is required to withhold a sum representing income tax, including for payments of yearly interest.

It provides that the relevant payments are a payment from which a:

(a) deposit-taker or building society is required to deduct a sum representing income tax under section 851 of the Act

(b) UK resident company is required to deduct a sum representing income tax under a number of sections within the Act covering, amongst other things, payments:

  • of yearly interest,
  • in respect of building society securities,
  • of UK public revenue dividends,
  • annual payments by persons other than individuals,
  • patent royalties,
  • royalty payments etc when the owner lives abroad,

(c) company is required to deduct a sum representing income tax under section 919(2) of the Act relating to manufactured interest on UK securities, payments by UK residents etc.

Inaccurate reporting or failing to pay Withholding tax can result in amongst other things, financial penalties and legal action by HMRC. Additionally, businesses may face increased HMRC scrutiny and audits, leading to further complications and potential discoveries of other discrepancies.

Tim Thompson of KANGS comments generally on Withholding tax.

Withholding Tax Accountability

Companies making payments of UK-source interest and royalties must, at present, retain Withholding tax at 20%, subject to exemptions and variations.

As it is the obligation of the payer to deduct the tax from the payment, if HMRC deems it necessary to raise an Assessment, it will usually be against the payer as opposed to the recipient of the payment.

Accordingly, such administrative burden requires the person responsible for making the payment to:

  • to ensure that the correct amount of income tax payable is retained,
  • submit Returns which reflect the amounts paid and withheld,
  • account for the correct amount of tax to HMRC,
  • inform the recipient that the required amount of tax has been deducted and paid to HMRC.

Exemptions and Relief

Defined exemptions and reliefs may be applicable, involving:

  • double tax treaty relief and set-off relief,
  • short rather than yearly interest,
  • interest paid on regulatory capital securities,
  • UK to UK exemptions,
  • qualifying private placement exemptions,
  • interest paid by banks in the course of their business,
  • exemption for interest paid on an advance from a bank,
  • certain peer-to-peer loans.

How Can We Help?

Failing to report accurately and promptly to HMRC is highly likely to result in interest charges on overdue taxes and potentially, imposing further penalties, especially if the failure to report correctly stems from fraudulent evasion.

The requirements attaching to the administration of Withholding tax are extremely technical and HMRC acknowledges that accountability is sometimes difficult to determine, it is essential where uncertainty and tax disputes arise that immediate legal advice is sought.

The Team at KANGS provides a wealth of experience gained from assisting clients involved with tax issues of every nature and will be pleased to hear from you.

Our Team will support you throughout the entirety of any HMRC investigation or proceedings, seeking to achieve the most satisfactory outcome available as quickly and economically as possible.

If we can be of assistance, please do not hesitate to contact our Team using the details below:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

Hamraj Kang

Hamraj Kang
Senior Partner

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Tim Thompson

Tim Thompson
Partner

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Nazaqat Maqsoom

Naz Maqsoom
Associate

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