Withholding Tax & UK Source Interest
A new case has confirmed the way in which to determine whether interest is "UK source" and so potentially subject to 20% UK withholding tax (UK WHT).Whilst there are various provisions under which UK
A new case has confirmed the way in which to determine whether interest is "UK source" and so potentially subject to 20% UK withholding tax (UK WHT).
Whilst there are various provisions under which UK WHT applies, a good working assumption is that 20% UK WHT may apply where "yearly interest arising in the UK" is paid. Whether it will actually apply will depend on who is paying the interest and who is receiving the interest, and whether any domestic law or double tax treaty exemption applies. "Yearly interest" broadly means interest under a loan with a term of a year or more (or which may continue for a year or more - eg rolling facilities). "Arising in the UK" means that the interest must be UK source interest. This is what the present case was about - Ardmore & Another v HMRC
There is precious little authority as to the meaning of "UK source". The leading case is Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA [1971], or the Greek Bank case, for short!
In the present case, the appellants argued before the Upper Tribunal that:
These arguments were broadly rejected by the Upper Tribunal, in a judgment that is very much "as you were", reaffirming the principles derived from the Greek Bank case and requiring a "multi-factorial" approach to be taken.
The Tribunal concluded that the Greek Bank case, which was binding on it, decided (on the facts of the case) that: "Relevant factors were the residence of the debtor and the original guarantor, the location of the security originally provided, and the ultimate, or substantive, source of discharge of the debtor's obligation". The Upper Tribunal found that "the source of the obligation must be ascertained by a multi-factorial enquiry" and "the legal situs of the debt is not a relevant factor for income tax purposes".
The Upper Tribunal noted that HMRC consider "the residence of the debtor to be the most important [factor] because this, along with the location of the debtor's assets, will influence where the creditor will sue for payment of the interest and repayment of the loan". However, the Upper Tribunal took the view that residence "is only one factor, and cannot be elevated into the most important factor, whether alone or when combined with the question of the location of the debtor's assets. The Greek Bank case did not determine any hierarchy of materiality or weight, and none can be inferred. The question is simply a multi-factorial one, having regard to all the circumstances and all the relevant facts".
Whilst each case turns on its facts, the Ardmore case is a useful re-examination of the meaning of what is quite an abstract term: UK source. The case only goes so far though, because, wherever a "multi-factorial" approach is to be adopted, especially where there are no hard and fast rules as to the weight to be allocated to each factor, there will be areas of grey, and it pays as a borrower to check the UK WHT position of your debt in advance of entering into it. It would be a nasty surprise to find that you should have been operating 20% UK WHT, not least where there is a contractual obligation on the loan to the effect that you have to "gross-up" payments to the lender where such WHT applies. Watch out for the WHT analysis on any loans you enter into, whether all within the UK or not and whether arm's length or not, and remember that UK WHT is the obligation of the person paying the interest, not the person receiving it.
Whilst there are various provisions under which UK WHT applies, a good working assumption is that 20% UK WHT may apply where "yearly interest arising in the UK" is paid. Whether it will actually apply will depend on who is paying the interest and who is receiving the interest, and whether any domestic law or double tax treaty exemption applies. "Yearly interest" broadly means interest under a loan with a term of a year or more (or which may continue for a year or more - eg rolling facilities). "Arising in the UK" means that the interest must be UK source interest. This is what the present case was about - Ardmore & Another v HMRC
There is precious little authority as to the meaning of "UK source". The leading case is Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA [1971], or the Greek Bank case, for short!
In the present case, the appellants argued before the Upper Tribunal that:
- the source of interest should properly be found by ascertaining the "nationality" or the "residence" of the relevant loan instrument
- if that was not accepted, then the First Tier Tribunal erred in law by giving too much weight to the residence of the debtor as a criterion (and, where the loan instrument in question is subject to the laws of a foreign jurisdiction, the question of the residence of the debtor should not be a factor at all)
- in the alternative, the source of the interest is the place where the credit is provided.
These arguments were broadly rejected by the Upper Tribunal, in a judgment that is very much "as you were", reaffirming the principles derived from the Greek Bank case and requiring a "multi-factorial" approach to be taken.
The Tribunal concluded that the Greek Bank case, which was binding on it, decided (on the facts of the case) that: "Relevant factors were the residence of the debtor and the original guarantor, the location of the security originally provided, and the ultimate, or substantive, source of discharge of the debtor's obligation". The Upper Tribunal found that "the source of the obligation must be ascertained by a multi-factorial enquiry" and "the legal situs of the debt is not a relevant factor for income tax purposes".
The Upper Tribunal noted that HMRC consider "the residence of the debtor to be the most important [factor] because this, along with the location of the debtor's assets, will influence where the creditor will sue for payment of the interest and repayment of the loan". However, the Upper Tribunal took the view that residence "is only one factor, and cannot be elevated into the most important factor, whether alone or when combined with the question of the location of the debtor's assets. The Greek Bank case did not determine any hierarchy of materiality or weight, and none can be inferred. The question is simply a multi-factorial one, having regard to all the circumstances and all the relevant facts".
Whilst each case turns on its facts, the Ardmore case is a useful re-examination of the meaning of what is quite an abstract term: UK source. The case only goes so far though, because, wherever a "multi-factorial" approach is to be adopted, especially where there are no hard and fast rules as to the weight to be allocated to each factor, there will be areas of grey, and it pays as a borrower to check the UK WHT position of your debt in advance of entering into it. It would be a nasty surprise to find that you should have been operating 20% UK WHT, not least where there is a contractual obligation on the loan to the effect that you have to "gross-up" payments to the lender where such WHT applies. Watch out for the WHT analysis on any loans you enter into, whether all within the UK or not and whether arm's length or not, and remember that UK WHT is the obligation of the person paying the interest, not the person receiving it.