UK and International Tax news

UT Issues Decision On Whether Interest Was Yearly And Subject To Withholding

Tuesday 13th June 2023

The Upper Tribunal 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 [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 by various lenders on Guernsey.

Following tax advice, loan refinancing arrangements were put in place with the objectives 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, 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 from 2012, 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 to a Guernsey entity, 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 and the taxpayer appealed to the FTT on four grounds:

(1) As regards interest payments to the UK tax resident company which took place in later years, these fell within the statutory exception to the withholding tax obligation under s.933 ITA 2007. That 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.

(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.

The FTT rejected the taxpayer’s appeal.

With tax of £2.79m at stake on the interest payments, the taxpayer appealed to the Upper Tribunal on all four grounds.

After detailed analysis and commentaries on the decisions in the cases of Indofood, McGuckian, Lehman, Gosling, National Bank of Greece and Ardmore, the UT rejected all four grounds of the taxpayer’s appeal.

In addition, the UT made specific reference to the application of Regulation 2(2) of the DTR Regulations 1970, and rejected the taxpayer’s arguments that a payer of interest can make gross payments by relying on a double taxation agreement, even where HMRC have not made any direction under Regulation 2(2). A direction under Regulation 2(2) is only needed if a claim for relief is made. The argument that a taxpayer would be relieved from withholding whether or not a direction was made was erroneous. Therefore, the UT held that the FTT had not erred in concluding that the UK/Guernsey double taxation agreement did not disapply the withholding tax obligation, given the absence of either a claim for relief or a Regulation 2(2) direction by HMRC. This ground of appeal had to fail.

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

 

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