Property investment and development company Hargreaves has failed in its bid to save close to £3m through tax-efficient loan arrangements.
A three-judge panel at the Court of Appeal ruled yesterday that the company’s tax planning arrangements did not excuse it from paying tax on interest, held offshore, that had been generated from loans.
Specifically, the court upheld a lower court ruling that the “commercial reality” of the arrangements put the company within the withholding tax rules.
The case highlights HMRC’s willingness to take a practical rather than legalistic view of tax-efficient cross border arrangements that could eat into the bottom line of highly-leveraged businesses like property investors.
According to the ruling, Hargreaves’ main business was property investment, much of which is funded though unsecured borrowing and family loans.
After taking tax advice the company implemented a complicated scheme in which interest from loans raised overseas was sent to a third party based in Guernsey before being sent back to the UK company, and the loans were arranged to last less than a year.
Hargreaves argued that the interest was not subject to UK tax for a number of reasons, including the fact that source of the payments did not come from the UK and the interests was not annual.
HMRC disagreed and won in the First Tier Tribunal, the Upper Tribunal, and again, yesterday, in the court of appeal.
The court, in its ruling, said the loans could not be viewed as short-term advances.
It said: “In reality […] the lenders provided attractive long-term funding in the nature of an investment.
“The interest on the loans was yearly interest, even if the loan in question had a duration of less than a year.”
Hargreaves Property Holdings Ltd v Commissioners for HM Revenue & Customs
Court of Appeal (Lord Justice Jackson, Lord Justice Nugee, Lady Justice Fall) 15 April 2024
