UK withholding tax: substance over form

14 July 2023

The Upper Tribunal (UT) judgment in Hargreaves Property Holdings Limited v HMRC confirms the decision reached by the First-tier Tribunal (FTT) that income tax should have been withheld on interest payments made by a UK company, demonstrating the continued approach by the courts of applying the law to the commercial substance of transactions rather than their strict legal form.


The case concerned arrangements involving interest-bearing loans to a UK resident company, designed with the intention that the interest payments would not be subject to UK withholding tax (WHT). WHT is due on ‘yearly interest’ with a UK source, payable to beneficially entitled persons other than UK companies, where the withholding requirement is not overridden by a relevant double tax treaty. The actions taken in an attempt to avoid the withholding obligation included:

  1. structuring the loans so that it could be argued that the interest did not arise in the UK, on the basis that: the payments were made, and any debt enforcement proceedings were required to be brought, outside the UK, and the governing law of the loan agreements was not-UK law;
  2. organising the loans so that it could be argued that the interest payments were not yearly interest, on the basis that the loan duration was either less than a year or only a little over a year; and
  3. assigning the right to receive interest payable under the loans to a UK resident company prior to payment being due, such that it could be argued that the exception from the requirement to withhold tax on payments to UK companies applied.

The appellant further argued that relief was available under the UK:Guernsey double tax treaty.

Did the payments arise in the UK?

The UT agreed with the FTT, which followed the multi-factorial test established in the Court of Appeal case of Ardmore Construction Limited v HMRC, and concluded that payment had arisen in the UK due to the most significant relevant factors, being that the debtor:

  • was a UK resident company; and
  • carried on its business exclusively in the UK.

This meant that interest payments were ultimately funded out of assets situated, and profits of activities conducted, in the UK and that any judgment obtained in enforcement proceedings would necessarily have to be enforced against assets situated, and profits of activities conducted, in the UK.

Were the interest payments yearly interest?

The UT considered that the FTT was correct to apply the ‘Hay tests’ established in earlier case law to determine that, although each individual loan was short-term in nature, the series of loans, when taken together, provided financing with a measure of permanence. Consequently, yearly interest was payable on the loans.

Was the UK resident company beneficially entitled to the interest payments?

The FTT applied the principles set out in the line of cases starting with Ramsay v IRC, requiring relevant statutory provisions to be given, 'a purposive construction in order to determine the nature of the transaction to which it was intended to apply, and then to decide whether the actual transaction, viewed realistically, falls within the ambit of the provision.’ Here, the purpose of the legislation is: to ensure UK income tax is collected on interest arising in the UK to beneficially entitled persons that are not UK resident (ie where there is no one in the UK to pursue); and, to remove that obligation to withhold where the person beneficially entitled is a UK resident company (ie where the tax ‘can readily and fairly be collected’ from the recipient). The term ‘beneficially entitled’ not only excludes situations where the recipient acts in a fiduciary capacity but may also, depending on the particular circumstances, exclude situations where the commercial and practical reality is that the interest, once received by a UK resident company, is then paid on to an entity outside the UK without attracting WHT. In that situation, there is the same underlying concern that tax on the income will not in practice be able to be collected. In this case, the assignment without commercial purpose was relevant in determining how the transaction should be realistically viewed. On the basis that the UK resident company paid out sums as consideration for the right to receive payment of interest, the UT agreed with the FTT that it was not beneficially entitled to the income for purposes of the legislation.

Was relief available under the double tax treaty?

The argument for treaty relief fell down on the basis that no claim for relief had been made and no direction had been given by HMRC allowing interest to be paid without deduction of tax.

What can be learned?

This decision provides useful guidance on whether interest arises in the UK, the meaning of ‘yearly interest’, and the interpretation of ‘beneficially entitled’ in the context of the WHT legislation. UK companies that have concluded that interest payments do not attract WHT may wish to revisit their technical analysis in light of the judgment.

The decision on the application of the double tax treaty is important given the potential for interest on late tax if the correct procedures are not followed, even where any tax withheld can be reclaimed by the recipient. It should be noted, in particular, that following withdrawal from the European Union (EU), the UK is no longer bound by EU law to disapply interest on late tax on payments to recipients in EU member states, as confirmed by updated guidance in HMRC’s International Manual.

For more information, please get in touch with Vinod Keshav or your usual RSM contact.