A legal battle with campaign group Privacy International over the level of surveillance by intelligence agencies has led to the disclosure of the legal loophole by Charles Farr, the director general of the Office of Security and Counter-Terrorism.
The continuing legal battle was brought by a collection of civil liberties groups as a result of the Edward Snowden revelations last year.
The former National Security Agency (NSA) employee revealed extensive snooping was being carried out by the US-based NSA and GCHQ.
The Government's interpretation means intercepting data can be carried out without a warrant under British law, which identifies an "external communication" as "those communications which are both sent and received outside the British Islands, whether or not they pass through the British Islands in the course of their transit."
Eric King, deputy director of Privacy International, said: "Intelligence agencies cannot be considered accountable to Parliament and to the public they serve when their actions are obfuscated through secret interpretations of byzantine laws."