Hargreaves Property Holdings Ltd paid interest on certain loans between 2010 and 2015.
HMRC formed the view that Hargreaves should have deducted and accounted for withholding tax on the interest.
Hargreaves disagreed and appealed to the First-tier Tribunal on four grounds. All four grounds were rejected ([2021] UKFTT 390 (TC). Hargreaves then appealed on similar grounds to the Upper Tribunal. Hargreaves’ appeal was dismissed ([2023] UKUT 120 (TCC)).
An appeal was filed with the Court of Appeal where two of the four grounds were pursued:
- whether interest payments made from 2012 onwards to a UK tax resident company, Houmet Trading Limited (“Houmet”), fell within the exception from withholding tax in s.933 Income Tax Act 2007 (“ITA 2007”); and
- whether interest paid on loans the duration of which was less than a year, but which were routinely replaced by further loans from the same lenders, was “yearly interest” within s.874 ITA 2007.
Judgment
The Court of Appeal dismissed the appeal and upheld the decision of the Upper Tribunal.
Excerpts
“(…)
81. In conclusion on ground 1, I would dismiss Hargreaves’ appeal. The FTT and UT correctly concluded that Houmet was not beneficially entitled to the interest assigned to it.
(…)
86. In this case the FTT found that the loans fulfilled an important commercial need for the business, and (being raised from connected parties) both left the borrower’s assets free from security and could be raised quickly and at minimal cost (para. 78 of the FTT’s decision). They were also repayable on demand (para. 79). However, there was a pattern under which loans were routinely replaced by a further loan from the same lender in the same or a larger amount. The FTT found that the enquiries made of lenders as to whether they wished to carry on lending were formalities, and a new loan was never declined (para. 87).
87. In my view the FTT and UT applied the correct legal approach. The FTT made no legal error in concluding that the interest was yearly interest because the loans were in the nature of long-term funding, were regarded by the lenders as an investment and formed part of the capital of the business, with a permanency that belied their apparent shortterm nature (paras. 79, 81 and 82). It makes no difference to this whether an individual loan happened to last for less than a year. On a business-like assessment, those loans could not be viewed in isolation as short-term advances. In reality, as the FTT concluded at para. 86, the lenders provided attractive long-term funding in the nature of an investment.
88. In conclusion, I would dismiss Hargreaves’ appeal on both grounds. Houmet was not “beneficially entitled” to the interest assigned to it for the purposes of s.933 ITA 2007, and the interest on the loans was yearly interest even if the loan in question had a duration of less than a year.”
EWCA Civ 365″]