Qualifying private placement withholding tax exemption

HMRC has been consulting on the new UK interest withholding tax exemption for qualifying private placements and a further draft of the relevant regulations has just been circulated for comment. The basic conditions were set out in the Finance Act 2015 and merely required interest to be paid on a security representing a loan to which a company is a party as debtor and which is not listed on a recognised stock exchange.

The crucial details are, therefore, contained in this secondary legislation.

Impact of the exemption

We issued our briefing "Qualifying private placements - new UK withholding tax exemption" when the first draft of the regulations were published; this latest draft helpfully clarifies certain matters and removes yet more of the conditions.

However, our key point remains that this new exemption will not be as seminal a change as had originally been hoped. It seems increasingly clear that the benefit of the exemption is, in practice, likely to be limited to lenders resident in countries which have double tax treaties with the UK, particularly those for which the rate of withholding was merely reduced under the treaty to five or ten per cent rather than eliminated altogether.

This means that lenders in China, Japan, Korea, Italy and Indonesia will now be able to lend direct to the UK without suffering any withholding, which could open up some new sources of capital.

A second ongoing consultation could, however, lead to wider relaxations of the UK withholding regime in the Finance Act 2016.

Changes since the last draft

HMRC has responded very positively to the various concerns raised at the last consultation working group meeting. In particular:

• It has been clarified that loans as well as debt issued in the form of notes or bonds will be eligible for the exemption.
• Existing debt which meets the new conditions has been brought within the exemption. This is particularly helpful as it removes the need to renew treaty clearances, and will eliminate withholding altogether on eligible existing debt which currently benefits only from a reduced rate under a treaty.
• The minimum value of the security or placement remains at £10m, but it has been confirmed that this is the value as at the date the placement is entered into. Fluctuations in value will not therefore affect the exemption.
• The debtor must certify that it reasonably believes it is not connected to the creditor. It is expected that an issuer will require in loan documentation that a new certificate be provided if the security is transferred by the creditor.
• Convertible debt may now qualify for the new exemption.

Next steps

There are a couple of aspects to this that Ashurst is still discussing with HMRC, in particular whether UK lenders lending through partnerships and offshore incorporated borrowers will be able to benefit from the exemption.

The next working group meeting will take place at the beginning of October where we hope to obtain some more clarity on these remaining issues.

Wider consultation on withholding

HMRC is currently undertaking a full review of options in relation to withholding on interest, including considering its abolition, although change is not expected under this wider review until mid-2016.

That review was started as a result of the decision to abolish certain withholding on interest paid on bank accounts. While that limited change is only going to apply to bank accounts, it has triggered this wider review of withholding on interest more generally. See the HMRC consultation document "Deduction of income tax from savings income: implementation of the Personal Savings Allowance" for more details.

It is too soon to tell where that is going to end up but a number of groups are pushing for further relaxations of the regime, especially for partnerships which cause particular issues at the moment

Please click on the links below for the other articles in the September 2015 tax newsletter:

• Changes to fund returns
• Larentia + Minerva: recovery of VAT by holding companies
• Intelligent Managed Services: TOGCs and intra-group supplies
• Improving large business tax compliance - a consultation document
• Massey: VAT planning and abuse