Hargreaves Property Holdings Limited v The Commissioners for HMRC

Whether interest is subject to withholding tax depends on the statutory purpose and practical substance of the arrangements, not merely their legal form. The exception for a UK resident company that is beneficially entitled to interest does not apply where the company is interposed without commercial purpose and promptly pays the interest to an entity outside the UK. A double taxation agreement does not disapply withholding unless the statutory procedural requirements, including a claim and the relevant HMRC direction, are met. Interest may be yearly even where individual loans last less than a year if, viewed commercially and in context, they form part of permanent investment-like funding. The source of interest is determined through a practical, multifactorial assessment.

The appellant financed its UK property business through loans from connected lenders. It arranged assignments of interest and principal to Guernsey entities, repeated repayments and re-advances, and later assigned interest to a UK resident company. HMRC assessed the appellant for failing to deduct tax under section 874 of the Income Tax Act 2007.

The First-tier Tribunal rejected four grounds concerning the section 933 exception, the UK/Guernsey double taxation agreement, the meaning of yearly interest, and the source of the interest. The Upper Tribunal considered the appellant’s appeal from that decision.

1. Section 933. The phrase beneficially entitled had to be construed in its statutory context and in light of the purpose of the withholding obligation in section 874. The exception is directed to a UK company substantively entitled to receive and enjoy the income. It does not necessarily extend to a company which receives interest only to pass it promptly to an overseas entity, particularly where its interposition has no commercial purpose. The approach in Indofood International Finance v JP Morgan [2005] EWHC 2103 (Ch) could not simply be transplanted into section 933. The ground failed.
2. Double taxation agreement. The business profits article of the UK/Guernsey agreement operated as relief from tax under section 6(2)(a) of TIOPA, rather than as an attribution provision under section 6(2)(d). A claim was therefore required under section 6(6). Further, gross payment could not be made without an HMRC direction under regulation 2(2) of the DTR Regulations. The word “may” in that regulation did not make the direction optional once relief was claimed. The ground failed.
3. Yearly interest. The assessment required a business-like evaluation of permanence and investment character. Individual loans were not to be considered in isolation where they formed part of a continuing sequence of similar advances and re-advances by the same lenders. Although each loan was repayable within or shortly after a year, the FTT was entitled to find that the funding had a measure of permanence, a tract of future time, and the nature of an investment. The ground failed.
4. Source of interest. Source was a fact-sensitive, multifactorial question assessed from a practical and realistic viewpoint. The FTT considered all material factors and was entitled to give greater weight to the UK residence and business of the debtor, the UK location of the assets and profits funding payment, and the place where enforcement would occur, than to foreign governing-law, jurisdiction, creditor-location and payment provisions. The appellate threshold for interfering with that evaluation was not met.

The appeal was dismissed.

• Upper Tribunal (Tax and Chancery Chamber): appeal from the FTT decision dismissed, [2023] UKUT 120 (TCC).
• First-tier Tribunal (Tax Chamber): appeal against HMRC’s withholding-tax assessments rejected, [2021] UKFTT 390 (TC).