Deductive reasoning: Hargreaves v HMRC

A company is in some circumstances required to deduct and account for income tax at the basic rate on making a payment of interest.  (A bonus point if you remember that the same applies to a partnership of which a company is a member.)

Hargreaves Property Holdings Ltd v HMRC [2021] UKFTT 390 (TC) was all about the precise circumstances in which tax must be so deducted.  It gives a very useful exposition of the rules.

On the facts of the case, tax was deductible only if:

  • The interest arose in the UK i.e. had its ‘source’ in the UK;
  • The interest was ‘yearly’ interest;
  • The payer was not relieved from the obligation to deduct tax by the terms of a double taxation treaty (specifically, in this case, the UK/Guernsey treaty); and
  • The party ‘beneficially entitled’ to the interest was not a UK resident company.

Each of these aspects is worth examining in turn.


Case law has determined that this is a ‘multi-factorial test’ requiring an assessment of where the interest arises as a matter of ‘underlying commercial reality’.  Factors such as the law governing the loan agreement, where payments are required to be made and where recovery proceedings must be brought, are of less importance than where the debtor resides and carries on the activity which generates the income which funds payment of the interest and where the assets are located against which any judgment will be enforced.

Hargreaves was a UK resident property investor: the Tribunal’s reasoning that the interest it paid arose in the UK is one that is likely to be equally applicable to many such investors.


Given that most of the case law cited by the Tribunal is well over one hundred years old (including one case that dates from 1854) you might be forgiven for thinking that the principle must by now be fairly well-established.   In fairness, it probably is: it’s the application to the facts that can be tricky.

Essentially, interest is ‘yearly’ if it arises on a loan which affords, taking a practical and unblinkered view of the matter, long-term (meaning more than one year’s) finance to the borrower.  Thus the fact that a loan may technically be repayable on demand is not conclusive if the reality is, as it was here, that ‘although each individual loan was short-term in nature, the loans provided by each Lender, when taken together, provided financing to the Appellant with a measure of permanence which had a “tract of future time” and that financing was in the nature of an investment for the Lender in question.

Treaty relief

There was some discussion before the Tribunal as to whether the interest was treaty-exempt from tax in the hands of the lender as ‘industrial or commercial profits’; and if so, whether such exemption was available only if claimed by the lender.  However, the Tribunal did not consider those questions to be relevant.  Rather, it considered that the matter had to be looked at from the perspective of the borrower who paid the interest.

The question whether the interest was or was not exempt from tax in the hands of the lender missed the point: a double taxation treaty absolved the payer from deducting tax only if, pursuant to the regulations governing double taxation treaties, HMRC had given a direction to that effect.  The Tribunal rejected the proposition that ‘a payer of interest can make gross payment of the interest in reliance on the terms of an applicable double tax treaty even in the absence of a direction under the DTR [Double Taxation Relief] Regulations’.

Beneficial entitlement

The final question was whether the interest was an ‘excepted payment’ (so that tax did not need to be deducted) because the party beneficially entitled to it was a UK resident company.

The interest had certainly been paid to a UK resident company, but that was not conclusive.  The right to receive the interest had been assigned to that company only a very short time before Hargreaves paid the interest and ‘the commercial reasons for its participation in the refinancing structure are far from obvious’.

The Tribunal referred to the earlier case of McGuckian in which the House of Lords applied the Ramsay principle (namely that ‘in the application of any statutory provision, it is necessary to adopt a purposive approach to construing the provision and then consider whether the transaction which is alleged to fall within the provision, when viewed realistically, falls within the ambit of the provision’). In McGuckian, the right to receive a dividend was sold for what purported to be a capital sum which was met out of the proceeds of a dividend received by the purchaser a few days after the purchase: it was held that the substance of what had occurred was that the amount received was dividend, not capital proceeds.

Similarly, the Tribunal in Hargreaves concluded that, looking at the facts realistically, the UK resident company was not to be regarded as having had a beneficial entitlement to the interest except to the limited extent, if any, to which what it received exceeded the amount it had paid for the right to receive it.

Thus, on the facts, the requirements for tax to be deducted were made out and the assessments (totalling close to £3m) were upheld.

For more information, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


By submitting this form, the data provided will be used to perform your request according to our privacy policy.