{"id":10637,"date":"2023-07-20T16:03:18","date_gmt":"2023-07-20T15:03:18","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=10637"},"modified":"2023-07-21T10:17:36","modified_gmt":"2023-07-21T09:17:36","slug":"wht","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/07\/20\/wht\/","title":{"rendered":"Pointless taxes that should be abolished #3: withholding tax"},"content":{"rendered":"\n

Interest withholding tax is easily avoided by sophisticated businesses, but a hassle for everyone else. Time for it to go.<\/em><\/strong><\/p>\n\n\n\n

I’m keen to identify taxes that don’t serve a purpose, don’t raise much money (or can be easily replaced) and add nothing except complication and economic distortion. The first two were stamp duty<\/a> and the bank levy<\/a>. The third is withholding ta<\/em>x.<\/strong>1<\/a><\/sup>I’d love to hear more ideas on pointless taxes that should be abolished. The only rule is that, given the current state of the public finances, the tax must either raise zero revenue, or be easily replaced by a simple expansion of an existing tax. So “let’s abolish VAT!” is a non-starter, I’m afraid.<\/span><\/p>\n\n\n\n

We’re all familiar with withholding taxes. The basic idea is: the government doesn’t trust us. In particular, it doesn’t trust us to pay tax on our earnings. So our employer is required to withhold tax on our salary, at more or less the right rate.2<\/a><\/sup>Actually almost everybody wins from this. Employees don’t have to worry about tax. Government doesn’t have to worry about employees not paying tax. Government gets paid the tax much earlier than it would under self assessment. Everybody except the poor old employer, who has to operate the system<\/span>.<\/p>\n\n\n\n

There’s another type of taxpayer the government trusts even less than employees, and that’s foreigners. If a foreign person receives interest paid by a UK person, then, in theory, the foreign person is subject to UK income tax at 20%.3<\/a><\/sup>The “in theory” hides a lot of complexity which is fascinating, but I won’t go into now<\/span>. Realistically they’d often not pay it. So the UK charges a 20% withholding tax on interest paid to foreigners. 4<\/a><\/sup>The basic rule is in section 879 of the Income Tax Act 2007<\/a>. Strictly it’s a “requirement to deduct income tax at 20%” but most people call it “withholding tax”.<\/span><\/p>\n\n\n\n

How withholding tax works in practice is a hot mess. Most big-firm tax practitioners are used to dealing with it (it’s standard fare for junior tax lawyers\/accountants), which means we sometimes under-appreciate how cumbersome it is for everyone else. The length and wonkishness of this article is itself an argument for abolition.<\/p>\n\n\n

How things work now<\/h2>\n\n\n

There are many exemptions from interest withholding tax. The most important ones are:<\/p>\n\n\n\n