Restructuring did not change commercial reality of loans

In Hargreaves Property Holdings Limited v HMRC [2023] UKUT120, the Upper Tribunal confirmed that the restructuring of the group’s loans failed to alter the underlying nature of the loans, meaning £2.7m of withholding tax was payable.

• The appellant was a UK resident company holding investment properties, with financing from various sources, including offshore lenders.
• As a result of tax planning, a number of Loans were restructured in order to designate that the interest receivable belonged to a third party in Guernsey and so was outside the scope of UK tax.
• At the same time, the loan principal was also assigned to the same non-UK third party.
• At a later date, the interest was assigned to a UK company, so the interest was paid to another UK company. The UK assignee, in turn, paid similar amounts of consideration to Guernsey for the receipts.
• The loans and facility were either repayable on demand or within a short period of time, such as 30 days, but repaid through the lender advancing enough to cover the original loan and enough for future requirements.
• HMRC assessed the loan interest as being annual in nature and from a UK source and, as payable to a non-UK resident company, subject to Withholding tax on payment.
• The total withholding tax being appealed was approximately £2.7m.

s.874 Income Tax Act 2007, requires a person paying interest to withhold tax if that interest is paid to a non-resident. The FTT held that:

• The interest paid did have a UK source and it was annual in nature, meaning the duty under s.874 was met.
• The exemption to the rule (s.933), where the person beneficially entitled is a UK resident company, did not apply as the UK assignee was not beneficially entitled.
• The appellant was not able to rely on the Guernsey Treaty or s.933 ITA 2007 to allow them to make interest payments gross, as no claim had been made and neither had a direction to pay gross been issued by HMRC.

The company appealed to the Upper Tribunal (UT)

The UT found that the FTT had made no errors in law:

• 'Beneficially entitled'was to be interpreted in a more technical sense and not the general legal sense. It made no sense that s.933 would exempt the withholding of tax if the UK recipient was merely to onward pay this sum to a non-UK resident. The commercial and practical substance of the transaction should be looked at. The UK assignee of the interest had no business purpose for receiving the interest.
• The disapplication of the withholding requirement needed a claim for relief under the UK/Guernsey Double Taxation Agreement and an HMRC direction as per the DTR regulations.
• All the loans had to be viewed together, looking at the commercial substance. Breaking the loans into shorter loans that did not last more than a year did not hide the true commercial purpose of providing continuing financial assistance. The interest was yearly.
• Assessing a source of interest was multifactoral, of which the FTT considered all relevant factors. On that basis, the FTT’s decision of fact cannot be challenged.

The appeal was dismissed.

Useful guides on this topic

Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?

Withholding Tax
When is Withholding Tax (WHT) paid? What are the applicable rates? Are there any exemptions?

Loan Relationships
What is a loan relationship? How are profits and losses made from loan relationships taxed? What happens if loans are written down or written off? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

External link

Hargreaves Property Holdings Limited v HMRC [2023] UKUT120

Hargreaves Property Holding Limited v HMRC [2021] TC08310