Withholding tax was due on interest paid by UK borrower

The taxpayer was the UK resident parent of a group of companies engaged in UK property development construction and investment. The group’s business was funded by loans. In 2004 the group restructured its loans with a view to ensuring that the loan interest no longer had a UK source. At the same time the lender assigned the principal to a Guernsey company or Guernsey trust. The interest and principal under the relevant loan was then repaid using amounts advanced by the lender.

From 2012 after being assigned to the Guernsey entity the interest was assigned to a UK incorporated and tax resident company before the sums were repaid.

HMRC said the taxpayer should have withheld income tax (ITA 2007 s 874) when paying the interest and raised assessments. The First-tier Tribunal dismissed the taxpayer’s appeal.

On the taxpayer’s argument that the interest was within ITA 2007...