A UK property investment, development and construction holding company has lost its appeal at the Upper Tribunal (UT) on not withholding income tax (WHT) from the payment of interest to providers of finance. The lenders had been people closely related to the company and for some the withheld income tax would have been an extra cost. The tax at stake amounted to just under £3m.
The company argued on four grounds that it wasn’t obliged to withhold income tax but the UT found that each ground didn’t have merit.
The first ground was that the imposition of a UK tax resident company; where a UK company pays interest to another UK company there is no requirement to withhold income tax from interest payments. The UT considered that the other UK company wasn’t beneficially entitled to the interest income as it quickly paid away any income to the finance providers under assignment agreements.
The second ground was that a tax treaty between Guernsey and the UK meant there was no requirement to withhold income tax. The relevant time was before the updated 2018 tax treaty between the UK and Guernsey came into force, which would require the WHT to be deducted in this case. The taxpayer had argued that the interest income were business profits and therefore not subject to WHT. The argument failed as the company hadn’t sought clearance from HMRC to pay interest gross under the UK/Guernsey treaty that dated from the 1950s.
The third ground was that the tenor of the loans was less than a year and therefore yearly interest didn’t arise and no obligation to WHT arose. The UT dismissed this argument as even though the legal documents indicated that the loans would be less than a year each lender continued to lend funds to the holding company over a long period of time. Taking all the loans together each lender had made a long-term investment in the UK company.
The fourth ground was that the source of the interest income wasn’t the UK but non-UK as the lenders were based overseas, and the legal documents were drafted under non-UK law with a clause stipulating that any legal action under the loans would take place outside the of the UK. Again, the UT wasn’t persuaded, while a multi-factor evaluative approach was required the lower tribunal hadn’t erred by placing greater weight on the fact the assets and profits that would repay the loans were all situated and generated in the UK. The fourth ground for appeal was is very similar to a case reported on in 2018 where the taxpayer held the source of the interest income was outside of the UK but the Court of Appeal sided with HMRC that the UK was the sources of the interest income, the UT commented on this case:
Withholding tax: source of interest income held to be the UK – Simpson Costea Chartered Certified Accountants
The decision can be found at: Hargreaves Prperty Holdings Limited v The Commissioners for HM Revenue and Customs [2023] UKUT 00120 (TCC) – GOV.UK (www.gov.uk)
Manging withhold tax on interest and royalties can be a complex matter and many businesses can expose themselves to tax risks without a robust analysis of the transactions involved. This is a subject matter that we are experienced with and will gladly help with advice or compliance matters. Please contact us if you have any questions.
