UK and International Tax news
FTT Hears Case on Yearly Interest And Withholding
Tuesday 23rd November 2021
The FTT has recently heard a case involving interest paid by a UK resident borrower on recurring loans provided by non resident lenders.
In Hargreaves Property Holdings Ltd v HMRC [2021] UKFTT 390 (TC), the appellant [HPH] was the UK tax resident parent of a group engaged in UK property investment for which loan finance was provided from various lenders on Guernsey.
Following tax advice, loan refinancing arrangements were put in place with the objective that all payments were to be made outside the UK from a source outside the UK, no loan advance would be secured over any assets in the UK and the loan agreements were governed by overseas law and the parties agreed to submit to the exclusive jurisdiction of the overseas courts.
Under the refinancing arrangements, each lender assigned its right to interest to a Guernsey resident entity shortly before it was due and its right to the principal to another group company. After each assignment, the interest was assigned again but to a UK incorporated and tax resident company. Shortly after each assignment, interest was paid and the principal repaid. The relevant lender would then make a new loan equalling or exceeding the amount of its previous loan to HPH, with the new loan being funded by the proceeds of the loan assignment. The cycle of assignment, repayment and new advance generally took place on an annual basis.
HMRC assessed the taxpayer to income tax on the interest payments. The taxpayer appealed on the grounds that it was not obliged to withhold tax since the payments did not have a UK source, were not yearly interest or alternatively had the benefit of relief under the tax agreement between the UK and Guernsey or the replacement lender was a UK resident company.
The FTT had to consider whether the interest paid on the loans had a UK source and, if so, was the interest yearly or short in nature. If the interest was UK source and yearly, could HPH rely on the Guernsey Treaty to make gross payments of the interest to the lender. With regard to assignments of loans and interest to the UK resident company, could HPH rely on s.933 ITA 2007 to make gross payments of the interest to the UK lender, being beneficially entitled to the income.
After extensive consideration, the FTT held that interest paid under the loans was UK source and yearly and neither of the exemptions applied. The tax assessments were upheld as the taxpayer had failed to comply with its obligation to withhold UK income tax from the interest payments. Leave to appeal was granted however.
If you would like further details on this case, please contact Keith Rushen on 0207 486 2378.
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