In Hargreaves Property Holding Limited v HMRC [2021] TC08310, the First Tier Tribunal (FTT) found that despite extensive offshore loan restructuring, loan interest paid from profits arising from UK assets was from a UK source. It was subject to withholding tax on the payment to non-UK recipients.

  • The appellant was a UK resident company holding investment properties, with financing from various sources, including offshore lenders.
  • As a result of tax planning, a number of the Loans were restructured in order to designate both the interest payable and receivable as outside the scope of UK tax. The planning involved the assignment of the loan principals and the right to the interest.
    • The loan agreements and loan facility agreements were all to be governed by the laws of Gibraltar or Jersey.
    • Payments under the agreement had to be made offshore from non-UK sources.
    • No UK assets were to be held as security.
  • The loans and facility were either repayable on demand or within a short period of time, such as 30 days.
  • HMRC assessed the loan interest as being annual in nature and from a UK source and, as payable to a non-UK resident company, subject to Withholding tax on payment.
  • The appellant contended that:
    • The interest was not yearly and did not have a UK source.
    • Even if the interest was held to be such, the person beneficially entitled to it was a UK resident company (disapplying the obligation to withhold income tax under s.933 ITA 2007).
    • Where the interest could be shown to form part of the 'industrial and commercial profits' of a Guernsey resident company, under the Guernsey Treaty, no obligation to withhold Income Tax arose.
  • The appellant appealed each assessment and upon the upholding of the assessments by an HMRC review, appealed to the FTT.
  • The disputed withholding tax amounted to just over £2.7 million over a period of five years.

On appeal, the FTT held that:

  • The interest paid did have a UK source.
    • Precedents set out that establishing the source of loan interest requires a multi-factor test that leads the 'practical person' to the 'underlying commercial reality'.
    • The residence of the debtor, the location of the assets out of which the interest was paid and the location of the assets against which any judgment would be enforced outweighed the location of the creditor and the jurisdiction of the agreements.
  • The interest was annual in nature.
    • Interest is classed as 'yearly' where the loan has a measure of permanence, with the expectation that it will last for a year or more, making it an investment in nature. It cannot be repayable on demand.
    • Each loan was repayable on demand and always paid within the year or just after. This was an annual cycle with each advance large enough to allow repayment of the last loan plus provide future funding. Objectively, the lending from connected persons was an investment in the property company in the form of the continual provision of finance.
  • The appellant was not able to rely on the Guernsey Treaty or s.933 ITA 2007 to allow them to make interest payments gross.
    •  In order to rely on a double tax treaty and not withhold Income Tax on a payment, a claim needed to have been made or a direction to that effect issued by HMRC.
    • On the facts, the assignment of the right to interest to a UK resident company had no other substance, in the eyes of the FTT than to offer an alternative argument (s.933) as to why withholding tax should not be paid in the case that the double tax treaty argument failed.
    • In law, following McGuckian, the FTT held that the company was only beneficially entitled to the assigned interest to the extent that what was received was more than the consideration paid. With the exception of some small sums, the FTT held the company was not benficially entitled to the interest and so s.933 did not apply in this respect either.

The HMRC assessments were upheld.

Useful guides on this topic

Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?

Withholding Tax
When is Withholding Tax (WHT) paid? What are the applicable rates? Are there any exemptions?

External link

Hargreaves Property Holding Limited v HMRC [2021] TC08310

Oak ad
Are you enjoying our content? 

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register with us now to receive our receive our FREE weekly SME Tax News updates.