UK withholding tax on interest

Hargreaves Property Holdings Ltd [2021] TC 08310

Key points – UK source income, where is the value coming from to repay the debt? Annual interest- all circumstances including purpose, i.e. whether a long-term investment or not.

Complex tax scheme, where one of HMRC’s arguments was that interest was yearly and UK source and therefore withholding tax applied. The taxpayer argued that it was non-UK source and short interest. The taxpayer lost on both counts and amongst other things, this could affect rolling over deep discount securities if the commercial reality is that the creditor sees the debt as a long term hold. The tests remain

  • the law of the agreement;
  • the place in which payment was actually made;
  • the jurisdiction in which judgment could be obtained;
  • the country in which the debtor is resident;
  • the country from, or in, which the debtor’s obligations to pay would be contemplated to be enforced or would substantially originate.

The question is the weight given to each ( a to c are more of a gateway test, i.e. fail one and no chance). Traditionally we focus on (d) but (e) is being used more often.

The FTT found, on the authority of National Bank of Greece SA v Westminster Bank Executor and Trustee Company (Channel Islands) Ltd [1971] AC 945 (a case which answers 90% of all banking tax questions) and Ardmore Construction Ltd v R & C Commrs [2018] BTC 27 (and before the Upper Tribunal [2015] BTC 536), that the first two factors ((a) and (b) above) were outweighed by the fact that the interest payments were necessarily funded out of assets situated, and the profits of activities carried out, in the UK. Even if any proceedings to recover the debt would have had to be taken outside the UK, any resulting judgment would have had to be enforced against UK assets and UK profits. That was the underlying commercial reality. As for factor (c), as counsel for the appellant conceded, very little weight was to be attached to it. Nor was the location of the creditor, being outside the UK, of any relevance.

As to whether the interest was yearly or short, in the view of the FTT, taking a business-like approach as established in Goslings and Sharpe v Blake (Surveyor of Taxes) (1889) 2 TC 450 and quoted with approval by Lord Briggs in R & C Commrs v Joint Administrators of Lehman Brothers International (Europe) (in administration) [2019] BTC 9, an objective view led to the conclusion that, notwithstanding the short-term nature of each individual loan, the loans were intended to form part of the longer-term funding of the appellant. On that basis, they satisfied three of the five tests for yearly interest in IR Commrs v Sir Duncan Hay, Bart (1924) 8 TC 636, approved in Lehman, namely that when taken together, they exhibited a measure of permanence, they were in the nature of an investment and had ‘a tract of future time’. The fact that each loan had an independent existence and was repaid after approximately one year did not mean that it should be viewed in isolation. Seen in context and in the light of the circumstances in which it was advanced and repaid, the long-term nature of the funding became apparent, so that the interest arising was of a yearly nature.

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