HMRC’s helpful guidance on withholding tax obligations following the transfer of loan receivables flags risks for intermediaries in the chain of payment, writes Eloise Walker, partner, Pinsent Masons.
HMRC has issued revised guidance on the person who is responsible for paying withholding tax (WHT) on payments of interest when loan receivables have been transferred (see HMRC’s Savings and investment manual at SAIM9078). This will occur typically on a securitisation or loan book sale. Often, the seller of the receivables (or its agent) will retain the legal title after disposing of the beneficial interest, while entering into a contractual obligation to hold payments of principal and interest for the new beneficial owner. The underlying borrowers will not necessarily be notified that beneficial ownership of the loans has been transferred.
Where yearly interest is paid to a person whose ‘usual place of abode’ is outside the UK, there will be a WHT obligation on the payer of the interest, unless HMRC has directed that interest need not be withheld (or can be withheld at a lower rate) because the owner of the interest is entitled to double tax treaty relief. It is the residence status of the beneficial owner of the interest which determines whether tax should be withheld.
HMRC has now confirmed that where payments move through a chain of intermediaries, HMRC will usually expect the last person in the chain (and not the borrower or the legal owner of the interest) to comply with WHT obligations before the payment moves to an overseas beneficial owner, and (provided this occurs) it will presume WHT obligations to have been satisfied by everyone else in the chain.
At first sight, HMRC’s guidance looks to be good news, and it will be helpful to certain types of securitisation. However:
If the last person in the chain does not comply properly, HMRC explicitly reserves the right to go after the borrowers (and, implicitly, any intermediary in the chain) for payment of the WHT. Depending on the deal, this may affect the risk and contractual position of intermediary payers in the chain and may mean, for example, that an agent in a residential mortgage securitisation will still want to apply for treaty clearance on behalf of all the underlying borrowers.
HMRC also confirms that if a legal owner of a receivable transfers interest to a beneficial owner, the payment should be regarded as being paid ‘through’ the legal owner, which is then obliged to withhold tax. Technically, this has always been the law on a strict reading, but some in the market have previously taken the position that it was not necessarily the case. Consequently, some intermediary payers may find themselves without contractual protection in respect of previous deals.
What should you do? On securitisations or loan book sales involving a non-UK resident, intermediaries in the chain of payment need to ensure their position is protected.
HMRC’s helpful guidance on withholding tax obligations following the transfer of loan receivables flags risks for intermediaries in the chain of payment, writes Eloise Walker, partner, Pinsent Masons.
HMRC has issued revised guidance on the person who is responsible for paying withholding tax (WHT) on payments of interest when loan receivables have been transferred (see HMRC’s Savings and investment manual at SAIM9078). This will occur typically on a securitisation or loan book sale. Often, the seller of the receivables (or its agent) will retain the legal title after disposing of the beneficial interest, while entering into a contractual obligation to hold payments of principal and interest for the new beneficial owner. The underlying borrowers will not necessarily be notified that beneficial ownership of the loans has been transferred.
Where yearly interest is paid to a person whose ‘usual place of abode’ is outside the UK, there will be a WHT obligation on the payer of the interest, unless HMRC has directed that interest need not be withheld (or can be withheld at a lower rate) because the owner of the interest is entitled to double tax treaty relief. It is the residence status of the beneficial owner of the interest which determines whether tax should be withheld.
HMRC has now confirmed that where payments move through a chain of intermediaries, HMRC will usually expect the last person in the chain (and not the borrower or the legal owner of the interest) to comply with WHT obligations before the payment moves to an overseas beneficial owner, and (provided this occurs) it will presume WHT obligations to have been satisfied by everyone else in the chain.
At first sight, HMRC’s guidance looks to be good news, and it will be helpful to certain types of securitisation. However:
If the last person in the chain does not comply properly, HMRC explicitly reserves the right to go after the borrowers (and, implicitly, any intermediary in the chain) for payment of the WHT. Depending on the deal, this may affect the risk and contractual position of intermediary payers in the chain and may mean, for example, that an agent in a residential mortgage securitisation will still want to apply for treaty clearance on behalf of all the underlying borrowers.
HMRC also confirms that if a legal owner of a receivable transfers interest to a beneficial owner, the payment should be regarded as being paid ‘through’ the legal owner, which is then obliged to withhold tax. Technically, this has always been the law on a strict reading, but some in the market have previously taken the position that it was not necessarily the case. Consequently, some intermediary payers may find themselves without contractual protection in respect of previous deals.
What should you do? On securitisations or loan book sales involving a non-UK resident, intermediaries in the chain of payment need to ensure their position is protected.
