The UK imposes withholding tax of 20% on interest paid to overseas lenders. This rate is reduced under some double tax treaties and in this case HMRC can issue a notice directing the UK borrower to apply the reduced rate of withholding tax to interest payments on the loan.

This can create an administrative burden for some foreign lenders as a notice needs to be issued for each loan and HMRC requires the overseas lender in each case to obtain proof of residence from the tax authority of their own country. Lenders making multiple loans to borrowers in the UK would therefore be required to go through this process for each loan. The administrative burden could deter foreign investors from making loans to UK borrowers.

The Double Tax Treaty Passport (DTTP) Scheme was introduced by the UK in September 2010 and is currently available for corporate bodies only. Under the scheme an overseas corporate lender can apply for a treaty passport which can be used to make multiple loans to UK borrowers without having to make separate applications for application of reduced withholding tax each time a loan is made. This means that administration is simplified because the lenders are not required to apply to HMRC and the tax authority of their own country every time a loan is made.

The borrowers in the UK just need to refer to the online database of passported lenders to check that the foreign lender has a valid passport and then notify HMRC before the first interest payment is made on a loan. Holders of the passport must apply for renewal every five years, otherwise the passport is cancelled. Since the scheme began around three thousand passports have been issued.

The consultation is asking for comments by interested parties on the DTTP scheme to ensure that the scheme is still adequate for the requirements of UK borrowers and foreign investors. The consultation also proposes an expansion of the scheme to cover funds and partnerships and asks for comments on the operation of the penalty regime for misuse of the scheme.