Hargreaves Property Holdings Limited v The Commissioners for HMRC

For the withholding-tax exception concerning payments to UK resident companies, beneficial entitlement requires a real and practical entitlement carrying some benefit. A company inserted briefly into an entirely tax-motivated scheme, without meaningful risk, reward or ability to use the receipts, is not beneficially entitled merely because it legally receives and pays on the interest. Statutory concepts are construed purposively and transactions are viewed realistically as a whole. Interest on formally short loans may nevertheless be yearly interest where the loans provide recurring long-term investment funding.

Hargreaves financed its property-investment business through loans whose interest rights were repeatedly assigned before repayment and re-advancement. HMRC considered that withholding tax should have been deducted. The First-tier Tribunal rejected four grounds of appeal ([2021] UKFTT 390 (TC)), and the Upper Tribunal dismissed Hargreaves’ appeal ([2023] UKUT 00120 (TCC)). Permission was granted on two issues: whether interest assigned to the UK resident company Houmet was an excepted payment under section 933 of the Income Tax Act 2007, and whether interest on repeatedly replaced loans lasting less than a year was yearly interest under section 874.

1. Appeal dismissed. Lady Justice Falk gave the leading judgment, with Lord Justice Nugee and Lord Justice Peter Jackson agreeing.
2. Purposive construction. The reference to beneficial entitlement in section 933 of the Income Tax Act 2007 was not immune from purposive construction. Following the approach explained in Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684 and applied in Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16, the court must identify the statutory purpose and description, then decide whether the transaction, viewed realistically and in the round, answers that description. A composite tax-avoidance scheme may be considered as a whole.
3. Beneficial entitlement. Beneficial entitlement broadly means entitlement with benefits. It overlaps with, but is not identical to, equitable entitlement. A legal owner or recipient who has only a mere legal shell, with none of the practical benefits of ownership, is not beneficially entitled. The fact that a UK company is taxable on receipts, or incurs expenses which offset them, does not remove the need to determine whether it obtained a real benefit.
4. Application to Houmet. Houmet’s involvement was ephemeral, entirely tax-motivated and unsupported by evidence of meaningful profit, risk, reward or ability to use the interest receipts for another purpose. It therefore did not satisfy section 933. The Court of Appeal’s approach in Indofood International Finance v JP Morgan Chase Bank [2006] EWCA Civ 158 was distinguished because it concerned an international fiscal meaning in a double-tax-treaty context. Khan [2021] EWCA Civ 624 and Good [2023] EWCA Civ 114 concerned the broader expression receiving or entitled to income and did not govern this issue.
5. Yearly interest. The question is determined by a business-like assessment of the loan’s likely duration and commercial character, not by its formal duration alone. Relevant considerations include permanence, investment character, repayment terms and the tract of future time. Although individual loans lasted less than a year and were repayable on demand, their routine replacement, commercial function and treatment as investment funding showed that they formed part of long-term funding. The interest was therefore yearly interest under section 874.

• Court of Appeal (Civil Division): dismissed the appeal on both grounds under [2024] EWCA Civ 365.
• Upper Tribunal (Tax and Chancery Chamber): dismissed Hargreaves’ appeal under [2023] UKUT 00120 (TCC).
• First-tier Tribunal: rejected all four grounds of appeal under [2021] UKFTT 390 (TC).