UK and International Tax news

Court of Appeal Issues Decision On Whether Interest Was Yearly And Subject To Withholding

Thursday 25th April 2024

The Court of Appeal has recently issued its decision in an appeal involving interest paid by a UK resident borrower on recurring loans provided by non resident lenders.

In Hargreaves Property Holdings Ltd v HMRC [2024] EWCA Civ 365, the appellant [HPH] was the UK tax resident parent of a group engaged in UK property investment for which loan finance was provided by various lenders on Guernsey between 2010 and 2015.  Following tax planning advice, changes were made to the terms on which the loans were advanced, and thereafter the creditors repeatedly assigned their rights under the loans to third parties shortly before the loans were repaid and then re-advanced by the original lenders.

HMRC formed the view that HPH should have deducted and accounted for withholding tax on the interest. The tax at stake was £2.8m. HPH disagreed and appealed to the FTT on the following four grounds:

(1) Interest payments to the UK tax resident company fell within the statutory exception to the withholding tax obligation under s.933 ITA 2007 which applied where the resident was “beneficially entitled” to the interest income.

(2) Payments to the Guernsey company were protected by the double taxation agreement between Guernsey and the UK.

(3) Some of the interest payments, which were for loans of less than a year or close to a year, were not payments of “yearly interest” and thus not caught by s.874 ITA 2007.

(4) The source of the interest under the relevant case-law principles was outside the UK, and the interest was not therefore interest “arising in the UK” under s.874. ITA 2007.

According to the FTT, there was no dispute that there was a commercial benefit in having access to unsecured finance from the lenders for the purposes of HPH’s business, but that “the sole purpose of the refinancing structure itself was to ensure that the interest accruing on the loans fell out of account for tax purposes for the lenders whilst the borrower’s corporation tax deduction remained intact and that there was no commercial purpose to the refinancing structure itself other than that tax advantage”.

All four grounds were rejected by the FTT. HPH appealed on similar grounds to the UT which also dismissed the appeal.

Two of the four grounds were then pursued to the CA, being:

(1) whether interest payments made from 2012 onwards to the UK tax resident company fell within the exception from withholding tax in s.933 ITA 2007, being excepted payments if the person beneficially entitled to the income in respect of which the payment is made is a UK resident company, and

(2) whether interest paid on loans the duration of which was less than a year, but which were routinely replaced by further loans from the same lenders, was “yearly interest” within s.874 ITA 2007.

Following detailed commentary on the decisions in particular in the cases of Indofood, McGuckian, Lehman, Gosling, National Bank of Greece, and Ardmore, the CA dismissed appeal (1) and held that the FTT and UT correctly concluded that the UK company was not beneficially entitled to the interest assigned to it.

The CA also held that FTT made no legal error in concluding that the interest was yearly interest because the loans were in the nature of long-term funding, were regarded by the lenders as an investment and formed part of the capital of the business, with a permanency that belied their apparent short-term nature. It made no difference to this whether an individual loan happened to last for less than a year. On a business-like assessment, those loans could not be viewed in isolation as short-term advances. In reality, and as the FTT found, the lenders provided attractive long-term funding in the nature of an investment.

If you would like further details on this case, please contact Keith Rushen on 0207 486 2378.

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