Hargreaves Property Holdings Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Falk,Lord Justice Nugee,Lord Justice Peter Jackson |
| Judgment Date | 15 April 2024 |
| Neutral Citation | [2024] EWCA Civ 365 |
| Court | Court of Appeal (Civil Division) |
| Year | 2024 |
| Docket Number | Case No: CA-2023-001517 |
Lord Justice Peter Jackson
Lord Justice Nugee
and
Lady Justice Falk
Case No: CA-2023-001517
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MRS JUSTICE BACON AND JUDGE SWAMI RAGHAVAN
Royal Courts of Justice
Strand, London, WC2A 2LL
Patrick Way KC and Dilpreet Dhanoa (instructed by Sharpe Pritchard LLP) for the Appellant
Richard Vallat KC and Calypso Blaj (instructed by HMRC Solicitor's Office and Legal Services) for the Respondents
Hearing date: 12 March 2024
Approved Judgment
This judgment was handed down remotely at 2.00pm on 15 April 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
This appeal relates to interest paid by the appellant, Hargreaves Property Holdings Limited (“Hargreaves”), 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 (the “FTT”) on four grounds. All four grounds were rejected by the FTT ( [2021] UKFTT 390 (TC), Judge Tony Beare). Hargreaves appealed on similar grounds to the Upper Tribunal (“UT”). In a decision of Bacon J and Judge Raghavan, Hargreaves' appeal was dismissed ( [2023] UKUT 120 (TCC)). Two of the four grounds are now pursued to this court with the permission of the UT.
In outline, the two grounds are (1) 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 (2) 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. Together the grounds cover a substantial proportion, but not all, of the tax the subject of the original appeal to the FTT.
Factual background
The factual background is uncontroversial. In outline, the appellant is a parent company of a property investment group which finances its activities with loans. Following tax planning advice, changes were made to the terms on which the loans were advanced, and thereafter the creditors repeatedly assigned their rights under the loans to third parties shortly before the loans were repaid and then re-advanced by the original lenders.
The UT's summary of the background, which cross-refers to paragraphs of the FTT's decision, provides sufficient detail for present purposes:
“12. The appellant's group acquired property primarily for property investment purposes. In the relevant period the properties held were in the UK, such that the income and capital gains of the group were made in the UK (§16(1)). Some of the group's loan funding took the form of unsecured borrowing from directors of the group, founder family members, Gibraltar-resident trusts of which they were settlors and/or beneficiaries, and the group's FURBS (funded unapproved retirement benefit scheme) (“the lenders”) (§16(3)). Before 2004 the loans were provided “somewhat informally”. In November 2004 the group restructured its loans with the intention that the loan interest would not be subject to UK tax, but would still generate relief for the UK group companies (§16(6)–(7)).
13. The new arrangements involved the following steps (§§16(7) and (9)):
(1) Shortly before the interest was paid by the group borrowing company, the relevant lender assigned for consideration the right to interest to a third party. This was initially a Guernsey-resident company [Storrier Trading Limited] (“Storrier”), run by Mercator, a group providing trust and corporate administration services. In subsequent years, this role was fulfilled by one of two Guernsey resident trusts also managed by Mercator (the “Guernsey Trusts”).
(2) At the same time, the lender assigned the principal to another company within the appellant's group. In later years after 2009 this step was omitted and both the principal and interest were assigned to the same third party.
(3) One or two days after the assignment, the appellant paid the interest and principal to the relevant third party.
(4) Arrangements were made for the relevant lender to advance an amount generally at least as large as the original loan amount principal to fund the above payment.
14. Interest and principal on the lender's new advance were in turn assigned as in step 1 above. The above process of assignment, repayment by the appellant and re-advance by the original lender continued throughout the period relevant to the appeal (October 2010–March 2015). In relation to interest payments made from 2012 onwards, Storrier [or the relevant Guernsey Trust] assigned the right to interest to a UK-resident company, Houmet Trading Limited (“Houmet”), also managed by Mercator, with the result that the appellant made interest payments to Houmet.
15. The loan documentation also changed to contain terms that (i) the loan was repayable on 30 days' notice by the lender or any time by the appellant; (ii) all payments were to be made in Gibraltar from a source outside the UK; (iii) no assets in the UK were secured; and (iv) Gibraltar law was the governing law and Gibraltar courts had exclusive jurisdiction. The revolving facility agreement with the FURBS contained similar terms, but referred instead to Jersey law and the Jersey courts (§16(12)).”
There was no dispute that there was a commercial benefit in having access to unsecured finance from the lenders for the purposes of Hargreaves' business, but that “the sole purpose of the refinancing structure itself was to ensure that the interest accruing on the loans fell out of account for tax purposes for the lenders whilst the borrower's corporation tax deduction remained intact and that there was no commercial purpose to the refinancing structure itself other than that tax advantage” (para. 16(8) of the FTT's decision).
The relevant legislation
Deduction of tax at source is dealt with in Part 15 of ITA 2007. The basic obligation to deduct tax from payments of yearly interest is contained in s.874, which, as in force in the relevant period, relevantly provided:
“ 874 Duty to deduct from certain payments of yearly interest
(1) This section applies if a payment of yearly interest arising in the United Kingdom is made–
(a) by a company,
(b) by a local authority,
(c) by or on behalf of a partnership of which a company is a member, or
(d) by any person to another person whose usual place of abode is outside the United Kingdom.
(2) The person by or through whom the payment is made must, on making the payment, deduct from it a sum representing income tax on it at the basic rate in force for the tax year in which it is made.
(3) But see–
(a) sections 875 to 888 as to circumstances in which the duty to deduct a sum under this section is disapplied; and
(b) Chapter 11 (payments between companies etc) for a further exception from the duty to deduct under this section.”
Chapter 15 of Part 15 provides for tax deducted pursuant to s.874 by UK resident companies to be accounted for to HMRC on a quarterly basis.
Chapter 11 contains certain exceptions from the obligation to deduct tax under s.874. So far as it concerns exceptions specifically for corporate payees it provides:
“ 929 Overview of Chapter
(1) This Chapter makes provision allowing some payments made by companies, local authorities and qualifying partnerships to be paid gross where they would otherwise be subject to specified duties to deduct sums representing income tax under this Part.
(2) Section 930 disapplies specified duties to deduct where a payment is made by a company, local authority or qualifying partnership which reasonably believes that the payment is an excepted payment.
…
(5) Sections 933 to 937 make provision as to when a payment is an excepted payment.
(6) Section 938 deals with what happens when a company, local authority or qualifying partnership makes a payment without deducting a sum representing income tax under a reasonable but incorrect belief that the payment is an excepted payment.
930 Exception from duties to deduct sums representing income tax
(1) The duties to deduct sums representing income tax mentioned in subsection (2) do not apply to a payment if–
(a) it is made by a company, local authority or qualifying partnership, and
(b) at the time the payment is made, the company, authority or partnership reasonably believes that it is an excepted payment.
(2) The duties to deduct are those under–
(a) section 874(2) (certain payments of yearly interest),
…
933 UK resident companies
A payment is an excepted payment if the person beneficially entitled to the income in respect of which the payment is made is a UK resident company.
934 Non-UK resident companies
(1) A payment is an excepted payment if each of the following conditions is met in relation to the payment.
(2) The person beneficially entitled to the income in respect of which the payment is made must be a non-UK resident company.
(3) The non-UK resident company must carry on a trade in the United Kingdom through a permanent establishment.
(4) The payment must be one that is required to be brought into account in calculating the chargeable profits (within the meaning given by section 19 of [the Corporation Tax Act] 2009) of the non-UK resident company.
938 Consequences of reasonable but incorrect belief
(1) This section applies if–
(a) a payment is made by a company, local authority or qualifying partnership without a sum representing income tax on the payment being deducted from it,
(b) at the time the payment is...
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