Withholding Tax : What it Means for Employers in UK

With Holding Tax (WHT) also refers as a Retention Tax, is a kind on income tax paid to the government by the employer and the credited withheld amount against the income tax is paid by the employee during the year. Referring the UK Domestic Law, the policy of regulation had been structured, collecting the income tax in respect of periodic payments, specifically wages paid to employees. The present basic rate of the income tax in the UK is 20%. It is also to be noted that there are many other conditions applied here, relevant to the income tax deduction, viz., source interest paid to the non – UK resident and other applicable circumstances. Since, the WHT is not deducted from the dividend, hence the dividend always be paid in gross as being irrespective of the terms of the applicable Double Taxation Treaties (DTT).

One of the major disadvantages of this practice is that as per UK Domestic Law guideline, when and where to imply the 20% tax according to the location of the company or a group of companies. The non UK corporate not having a residency in the UK somehow could not avail the exemption benefit at some extents, which also impact the long term employment in such companies and could even result shortage of gross income.

WHT to the Non-UK Residents – an Obligation

Section 874 (1) (D) and Section 874 (2) of the Income Tax Act (ITA), 2007, if the annually interest payment is raised in UK, which is further paid by a person from outside UK, then the amount calculated as the basic rate of the income tax, needs to be deducted from the whole amount of payable. (It should be noted further the basic rate is 20%) This system, creates a bit confusion about the processing of this tax, viz., categorization of the specific payment, accuracy in yearly interest calculation, defining the place (Inside or outside UK) and the term and conditions to being the resident.

1. If the interest is shown as paid or actually paid then the deduction of income tax is need to be calculated. The value of the interest is considered as paid if the cash transfer is equal to the interest value done to simplify the essential process.
2. Calculation of yearly interest defining the existence of the interest to be paid when considered to be kept as a long tenured payable value. This payable annually interest occurs with a long term loan outstanding.
3. Defining the residency of the person is again an issue to be resolved. Several measurements are to be taken into consideration, deciding the payable tax validity, viz., location of the assets along with the residency of the debtor; place specification of the business; legal formalities to compile the process, and securing the contractual process by having an evidence or guarantor. Further, HMRC guidelines clearly indicate the highest significance of the residential aspect of the person specific.

Interest and Royalties Directives

According to the directives, the same residency of the creditor and debtor in the state of European Union (EU), the relevant provisions may applicable for interest payment as to at least 25%. The non-UK business if getting the interest first files an application to HMRC to get the relief assistance. Somehow, the restrictive rules implies differently to the internal UK rules for corporates than that of outsiders.

Here it is to be noticed that domestic rules of UK needs the companies to make the interest paid up to 20% of the total withhold, which have some prohibitions too:

1. Interest payment to the qualifying limit essential for the exemption according to the EU Interest and Royalty Directives.
2. Payment on the interest made through or to the banks in the UK state.
3. Loans which interests are liable to be paid within the year, considered as “short interest”, should be paid first to qualify for the exemption.
4. Interest occurred outside UK, need to be assisted by expert to get the exemption at the desired level.

Along with the interest exemption and benefits, the royalties also be defined to get benefited with arise in the region of United Kingdom, helps to deduct the WHT at 20%. Though, the exemption can be secured on the payables only, but some assets based royalties, like firm royalty, equipment royalty, etc are not subject to get WHT in UK. If the company has a valid reason to get qualified for the WHT exemption, then it can too make the royalty payment even without withdrawing the clearance provided by HMRC.

Referring the updated guidelines of EU Interest and Royalty Directives, trademark, Brand Identity and other similar royalties also categorized in the qualifying markers of income tax deduction (As applicable from September 2016 onwards). The location of the business also defines the extension of royalty payment with respect to WHT on some special rights, effective from April, 2019.

Double Taxation Treaties (DTT)

The Double Taxation Contracts is widely practiced in UK. The interest exemption influenced by several business related conditions, and tends to exempt the complete 20% of the payable tax value sequentially deflating the tax value from 20% to zero. Since this double taxation does not bear a wide ranging impact over the tax practice in UK. As per HMRC the business is not allowed to use this article of the Directives, to claim complete relaxation from UK Interest Withholding Tax. Usually for UK Banks precisely, the format can be implemented. HMRC itself do not favor the practicing of double tax agreement to be implemented in the business of UK.

In the year 2010, the Double Tax Treaty passport scheme was launched by HMRC, which granted other overseas companies, having a resident or a company asset in the country, can also apply for the treaty passport, having the validity of five years. The core advantage of this facility was that the moneylender was eligible to file a separate treaty requisition for a loan to be sanctioned, simply falls under the rules of the scheme to be followed. This process only assumes when both the requisition parties are corporate figures.

Conclusion

The Interest and Royalty Directives of United Kingdom, suggests and command the Interest Withholding Tax to be processed to get the aforesaid exemption. Further, in terms of non-UK residents it also instructed for making the payments, somehow observed frustrating and biased taxation system of United Kingdom. To make a unique coding system regarding to the tax relief or payment to the corporates, it must be ensure that a clear and fair procedure should be followed to provide equal opportunity to ensure the development and security of business prospects establishing in United Kingdom.

However, the present scenario is not ensuring about the successful implementation of the With Holding Taxation system. The suggested domestic laws and guidelines are needed to be scrutinized thoroughly once to create equilibrium between the corporates from inside or outside UK. The implemented directives need to be strategized minutely again to maintain the law and similarity in the taxation system so as to get maximum business by providing huge tax relief to the business entities, although the Eurobond direction ensures to generate a significant, prominent and promised costs and benefits.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.