Hargreaves Property : What Does The Latest Decision Mean For UK Withholding Tax?

• Published date: 23 August 2023
• Subject Matter: Tax, Tax Treaties, Income Tax, Withholding Tax
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Cadwalader, Wickersham & Taft LLP

In many respects, the Upper Tribunal's decision in Hargreaves Property¹ will not have surprised tax practitioners as the decision reaffirms best practice considerations around a number of fundamental concepts in relation to UK withholding tax. However, the decision also raises questions concerning the interpretation of the UK's statutory withholding tax exemptions.

Facts

The case concerned a UK tax resident company, which was the ultimate parent company of a UK property group (Hargreaves Property Holdings Ltd ("Hargreaves")). Hargreaves had received financing from connected overseas lenders. Following tax planning advice, the terms of the loans were amended so that: (i) the loans were repayable on 30 days' notice by the lender or any time by the appellant; (ii) all payments were made in Gibraltar from a source outside the UK; (iii) no assets in the UK were secured; and (iv) Gibraltar or Jersey was the governing law and the courts of Gibraltar or Jersey had exclusive jurisdiction.

Shortly before the interest was paid by the borrower, the lender also assigned for consideration its right to interest to a third party. Initially, the third party was a Guernsey company ("Storrier") or Guernsey trusts. In later years, the loans were assigned to a UK resident company ("Houmet"). The consideration for the assignment was an amount equal to almost all of the interest which Houmet received.

Together, these changes were made with the intention of ensuring that the interest was:

1. in the case of interest paid to the Houmet, regarded as being paid within the statutory exemption under the Income Tax Act 2007 ("ITA 2007"), section 933 (i.e. interest paid to UK resident companies) and specifically that Houmet was "beneficially entitled" to the interest;
2. in the case of interest paid to Storrier, protected by the UK-Guernsey double tax treaty;
3. not regarded as "yearly interest"; and
4. not regarded as having a UK source.

The Upper Tribunal's decisions on each of these issues are considered below.

Beneficially Entitled

Under section 933 ITA 2007, interest paid to a UK resident company that is "beneficially entitled" to such interest may be exempt from the obligation to withhold on account of UK income tax.

Hargreaves contended that Houmet was "beneficially entitled" to the interest for the purposes of section 933 ITA 2007 notwithstanding that Houmet had an obligation to pay an almost similar amount to Storrier as consideration for the assignment of the loans.

Hargreaves argued...