Court of Appeal finds for HMRC in Hargreaves Property WHT case
HMRC win provides guidance on ‘beneficial entitlement’ and the importance of commercial reality in assessing UK withholding tax obligations
Guidance on ‘beneficial entitlement’ and importance of commercial reality in assessing UK
Introduction
The Court of Appeal (CoA) has dismissed the taxpayer’s appeal in Hargreaves Property Holdings Ltd v Revenue and Customs [2024] EWCA Civ 365, concluding that the UK’s withholding tax (WHT) rules did apply to debt financing provided to the company by overseas lenders.
The decision provides a helpful overview of both the principles of purposive interpretation as applied to tax legislation and the concept of beneficial ownership/entitlement used in various places in the UK tax code.
Details of the decision
There was no appeal against the conclusions of the First-tier Tribunal (FTT) and Upper Tribunal (UT) that the interest paid by the taxpayer had a UK source and that the taxpayer had failed to follow the correct process to benefit from any exemption under a double tax treaty (see our earlier article). However, the taxpayer still had two arguments that the bulk of the interest fell outside the WHT regime. These are discussed below along with the CoA’s response to each.
- Beneficial entitlement
The right to accrued interest had in many cases been assigned to a UK resident company (‘Houmet’) shortly before being settled. The taxpayer argued that a domestic law exemption (at s933 Income Tax Act 2007) for interest payments to which a UK resident company was ‘beneficially entitled’ therefore applied. In the taxpayer’s view, the concept of beneficial entitlement was an established legal one which, as such, could not be interpreted purposively so as to exclude the arrangements it had entered into.
The CoA robustly rejected this analysis, holding that it was clear from the authorities that “there is no special category of statutory concept that is immune from purposive construction”. Moreover, an examination of the case law relied on by the taxpayer as demonstrating the domestic law meaning of ‘beneficially entitled’ showed that, although indeed a well-established concept, the courts still sought to construe the term in its statutory context.
The WHT rules were intended to ensure that tax could be collected in difficult cases – for example, where the recipient of taxable income was outside the UK – and the exemption in question reflected the fact that recipients within the charge to corporation tax were not usually a concern. The exemption should therefore usually apply to a company entitled to interest income and not receiving it on behalf of anyone else.
The mere fact that expenses may offset some or all of the income did not change this conclusion, and the CoA explicitly distanced itself from comments of the UT which had suggested this might be the case – a clarification which will be welcomed by groups operating UK financing companies.
Conversely, the fact that interest is brought into account as a receipt does not automatically mean the recipient was ‘beneficially entitled’ to the income. Parliament could not be taken to have intended that the exemption should extend to a company whose involvement was entirely tax-motivated and not only lacked any commercial purpose but had no practical or real effect. Moreover, the case law (including that relied on by the taxpayer) showed that there was no difficulty in reading the statutory language as requiring the recipient to have an entitlement which carried at least some of the benefits that might derive from the right to receive the interest.
In concluding that the exemption was therefore not available on the particular facts of the case, the CoA noted that there was no evidence to suggest that Houmet could benefit from the funds it received or was exposed to any (upside or downside) risk in relation to these, noting that it was unknown whether the obligation to pay for the interest was simply dependent on its receipt. Similarly, there was no evidence that Houmet derived any meaningful profit from its participation in the arrangements.
Although arriving at the same outcome as both the FTT and the UT, the CoA’s detailed explanation of its reasoning highlights the unusual nature of the case and appears to be intended partly to address concerns raised by commentators as to possible broader impacts for commercial arrangements of the UT’s decision. Groups relying on this important exemption will therefore want to carefully consider the CoA’s judgment in full. - Yearly interest
The loans in question were repayable on demand and in some cases were actually repaid in less than a year. The taxpayer argued that the interest could therefore not be regarded as ‘yearly interest’, to which the UK’s WHT rules applied.
The CoA quickly rejected this argument, noting that 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 and that enquiries made of lenders as to whether they wished to carry on lending were mere formalities. On a business-like assessment, the loans could not be viewed in isolation as short-term advances, even in the cases where these did in fact last less than a year.
The FTT had therefore been right to conclude that the interest was yearly interest, because the loans were in substance long-term funding, regarded by the lenders as an investment and forming part of the capital of the business.
