Interest with a UK source? Upper Tribunal says multifactorial approach required in Ardmore and Perrin:

Tue 08 Dec 2015

The Upper Tribunal (UT) has upheld the First Tier Tribunal (FTT) decisions in the joined cases of Perrin and Ardmorewhich both concerned the obligation to deduct income tax from interest arising in the UK and paid to overseas loan creditors. Perrin concerned the obligation of an individual and Ardmore a company but nothing turned on this because the same section applies in the same way.

Basic rate income tax must be deducted from the payment of annual interest that arises in the UK:

·         by a company, local authority, partnership of which a company is a member; or

·         by any person to another person whose usual place of abode is outside the United Kingdom.

The only matter at in dispute in both cases was whether the interest arose in the UK.

The leading case on where interest arises is the decision of the House of Lords (now Supreme Court) in Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (“the Greek Bank case”) which clearly laid down a ‘multi-factorial’ approach that was to be applied to deciding where interest arose, as opposed to only considering the ‘residence’ of the loan documents themselves. The hearing of both appeals together removes uncertainty because it refutes the suggestion that in Perrin the multi-factorial approach was not adopted by the FTT – perhaps because the FTT’s judgment did not specifically use the words “multi-factorial”: in Perrin the UT took the view that multi-factorial approach had been followed without material error.

The UT confirmed that the multi-factorial approach is the only correct one to adopt and reconsidered both cases on that basis. Therefore counsel for the appellants set out to prove that:

·         in Perrin the FTT had not given the right weight to the factors involved; and

·         in Ardmore, the FTT had not applied the multi-factorial approach correctly.

UT upholds FTT decision in Perrin

In Perrin, the UT found that the FTT had not made a material error in reaching its decision and that the multi-factorial approach was correct.  Specifically, the UT judge stated that the FTT was right to have given weight to the residence of the debtor (Mr Perrin was UK resident), and the source of the funds for payment and enforcement.  In contrast other factors were not relevant: the place where credit was provided to Mr Perrin; the place of receipt of the interest (Isle of Man) or the fact that some payments were made out of Mr Perrin’s Isle of Man bank account.  As a result, the income arose in the UK, so income tax had to be deducted at source.

A procedural twist in Ardmore

The line of argument now used in Ardmore was intriguing because at the FTT stage counsel for the company had conceded that it would not succeed on a multi-factorial approach and so had tried a different argument, a strategy that was unsuccessful because the FTT decided to follow the multi-factorial approach and did find against the company. Ardmore now argued that it had been incorrect to concede that it could not succeed using the multi-factorial approach and so it asked to withdraw that concession.

The UT allowed Ardmore a second bite at the multi-factorial cherry but was still unable to find a material flaw in the FTT’s decision.  The UT upheld the FTT’s decision to give weight to the residence of the debtor (ie Ardmore) – which was UK resident.  Furthermore, it was right to have given weight to the fact that the source of the payments was derived from Ardmore’s trading activities (which were in the UK).  The place from which the money was lent and residence of the lender were both irrelevant.  In conclusion, the source was UK and income tax had to be deducted.