The question of whether interest has a UK source, thereby obliging the interest payer to withhold UK income tax, seldom comes before the courts. In the recent tax Upper Tribunal decision of Ardmore Construction Limited and others v HMRC [2015] UKUT 633 (TCC), weight was given to the residence of the debtor and actual source of payments in determining UK source of interest, disregarding the lender’s residence and the place where credit is provided.
Issues
This was a combined appeal from two decisions of the tax First Tier Tribunal. The taxpayers appealed on three principal grounds:
- First, that source of interest should depend on the “nationality” or “residence” of the relevant loan instrument;
- Secondly, if contrary to the first ground, the proper test is a multi-factorial test, too much weight should not be placed on the residence of the debtor; and
- Thirdly, it is the place where credit is provided that is the source of interest.
Decision
The tribunal held that the House of Lords decision in Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA [1971] AC 945 remains the only decision that binds the lower courts on this point. In National Bank of Greece, Lord Hailsham applied a multi-factorial test in determining source of interest.
While the multi-factorial test is not one which can be distilled into a convenient set of definitive factors, the tribunal identified a number of relevant factors as follows:
- The residence of the debtor;
- The residence of the original guarantor;
- The location of the security originally provided;
- The ultimate or substantive source of discharge of the debtor’s obligation;
- The residence of the creditor;
- The place where credit was advanced;
- The place of payment of the interest;
- The jurisdiction in which proceedings might be brought to enforce the interest obligation; and
- The proper law of the contract.
The tribunal also acknowledged that not all of those factors carry equal weight. The last five factors above would usually carry less weight than the other factors.
For completeness, the tribunal made clear that the legal situs of the debt is not a relevant factor in determining source of interest for purposes of withholding tax.
For a link to the Upper Tribunal decision, click here.
For a link to the full version of this article, which first appeared in Taxation on 11 February 2016, please click here.
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