The Court of Appeal rejected the argument that there was no requirement to withhold tax on interest payments made to a UK resident company. Viewed realistically the UK resident company was not 'beneficially entitled' to the assigned interest payments.
In Hargreaves Property Holdings Ltd v HMRC [2024] EWCA Civ 365, the Court of Appeal (CoA) upheld the decisions of the First Tier Tribunal (FTT) and Upper Tribunal (UT). The taxpayer was required to withhold tax on interest payments made to a UK resident company (HL).
- The taxpayer (HPHL), a UK resident company, financed its activities with loans from various sources.
- After undertaking tax planning, the loan arrangements involved the following steps:
- The original lenders advanced loans to HPHL.
- The original lenders assigned their rights under the loans to offshore third parties shortly before the interest was paid and the principal was repaid.
- The offshore companies assigned the interest payable to HL, a UK resident company. HL paid a consideration for the assignment, largely equal to the interest payments.
- The original lenders would then re-advance the loan to HPHL.
- The loans were repayable on 30 days’ notice by the lender or at any time by HPHL.
- HMRC raised an assessment, stating that HPHL should have deducted Withholding tax on the interest payments.
- HPHL Appealed to the CoA on two grounds, arguing that there was no requirement to withhold tax, the interest paid:
- Was an excepted payment: a UK resident company was beneficially entitled to the interest s.993 ITA 2007.
- Was not yearly interest: the duration of the loans was less than a year s.874 ITA 2007.
The CoA found that:
- The FTT and UT had correctly concluded HL was not 'beneficially entitled' to the interest assigned to it.
- Beneficial ownership cannot always simply be equated with equitable ownership. In appropriate cases, it can be interpreted as requiring a 'real and practical entitlement'.
- In substance, HL received interest payments that it merely onward paid to a non-UK resident.
- Viewed realistically, disregarding steps that are solely aimed at avoiding tax, HL’s artificial involvement had no commercial purpose, practical or real effect. The arrangement did not give rise to any risk or meaningful reward.
- The FTT and UT correctly concluded that the interest was a yearly interest:
- Loans were routinely replaced by further loans from the same lender for a similar or larger amount.
- On a business-like assessment, the loans cannot be viewed in isolation, it made no difference whether an individual loan happened to last for less than a year.
- The loans were in the nature of long-term funding.
The CoA dismissed the appeal.
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
What is Withholding Tax (WHT)? What are the applicable rates? Are there any exemptions? Can it be reclaimed?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Restructuring did not change commercial reality of loans
In Hargreaves Property Holdings Limited v HMRC [2023] UKUT120, the Upper Tribunal confirmed that the restructuring of the group’s loans failed to alter the underlying nature of the loans, meaning £2.7m of withholding tax was payable.
UK loan interest source not changed by offshore refinancing
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.
Loan Relationships
What is a loan relationship? How are profits and losses made from loan relationships taxed? What happens if loans are written down or written off? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?
External link
Hargreaves Property Holdings Ltd v HMRC [2024] EWCA Civ 365
