In December 2014 we issued our briefing “Tax exemption to boost non-bank lending in the UK” when the Chancellor had just announced, in the 2014 Autumn Statement, his plans to introduce the exemption from withholding tax for interest on private placements. At that time, the hope was that the new exemption would improve liquidity in the infrastructure funding market as well as allowing access to certain types of investor for whom it would have been historically uneconomic to lend to UK ventures. Now that the flesh has been added to the Chancellor’s proposal, has this hope been lived up to?
Lenders resident in countries which have double tax treaties with the UK will benefit from the new exemption. First, such lenders will no longer need to engage in the tax treaty clearance procedure, which will benefit both them and borrowers, as interest can be paid gross immediately. Secondly, existing debt which meets the conditions will also qualify for the exemption which means that the need to renew existing treaty clearances will be removed.
Where we expect to see the biggest change, however, is for lenders resident in a country with a double tax treaty with the UK where the rate of withholding is merely reduced under the treaty rather than eliminated altogether. In those cases, lenders based in jurisdictions such as China and Italy will now be able to lend directly to the UK without suffering any withholding on interest. The impact of this is likely to be twofold. First, existing lenders will be encouraged to commit more capital to the UK market. Secondly, new lenders may be encouraged to lend into the UK now that withholding will be eliminated (rather than merely reduced).
While the new exemption is more limited in scope than some would have hoped, its introduction should, as a minimum, reduce the procedural formalities on existing borrowers and lenders. Whether or not this will have a significant impact on liquidity in the UK non-bank lending space is not clear.