In Ardmore Construction and Andrew Perrin v HMRC [2015] UKUT 633 the Upper Tribunal (UT) confirmed that loan interest paid by UK residents had a UK source even though the loans were not governed by UK law.
S874 ITA 2007 provides that if a payment of yearly interest arising in the UK is made, (a) by a company... or (d) by any person to another person...outside the United Kingdom. The payer must deduct interest at source.
The First Tier Tribunal originally heard the two cases separately:
- Andrew Perrin and Ardmore Construction Ltd were both UK resident.
- Both had taken out cross-border loans from lenders who were not UK resident.
- Neither loan was subject to UK jurisdiction.
- Neither deducted UK tax from the interest they paid on the loans.
HMRC argued that the interest on both loans arose in the UK and that the payers should therefore deduct interest in accordance with s874.
Decision
In both cases, the FTT decided that the interest arose in the UK.
- The FTT gave weight to the residence of the payer and the source of the funds that the payer used to make the payments.
- Ardmore was repaying the loan using money derived from UK trading activities and Perrin was not able to demonstrate that he could repay his loan from non UK sources.
- The place where the loan was provided and the residence of the lender were not relevant.
The UT agreed that the question of whether the interest had a UK source was not the same as whether the loan had a UK legal situs.
The UT also agreed that the FTT was right to have placed such significance on the residence of the debtor and the source of the payments.
The appellants are seeking permission to appeal to the Court of Appeal. UPDATE: permission to appeal was granted and the Court of Appeal dismissed the appeal agreeing that the interest had a UK source. The Court of Appeal judge said that a practical approach was required and the decision was "acutely fact sensitive".
Comment
It is not always a straightforward matter to determine the source of income and this is further complicated with different rules for individuals and companies and EU law.
In Westminster Bank Executor and Trustee Company (Channel Islands) Ltd v National Bank of Greece SA (46 TC 472) the House of Lords set out a multi-factorial test in order to determine the source of interest. See our guide Withholding Tax.
Case references
Ardmore Construction Ltd v Revenue And Customs [2018] EWCA Civ 1438
Ardmore Construction and Andrew Perrin v HMRC [2015] UKUT 633
Andrew Colin Perrin v HMRC [2014] UKFTT TC03363
Ardmore Construction Ltd v HMRC [2014] UKFTT TC03580
