Posted on:Ardmore, Court of Appeal, Double Tax Treaty, EU Directive, HMRC, Income Tax, Interest, Straight to the Point, U.K. Tax, Withholding
Subject to the availability of a domestic exemption or relief under an applicable double tax treaty or EU Directive, a payment of yearly interest (as opposed to short interest) with a UK source to, amongst others, a non-UK person is subject to the deduction of UK income tax at the “basic” rate (currently 20%). The rules determining whether a payment of yearly interest has a UK source can be complex, although, if the payer is UK resident, it is somewhat easier!
Practical difficulties can arise, however, where the payer is not UK resident, but the wider arrangements have some connection to the UK. The UK tax authorities (“HMRC”) have published guidance on the factors that should be taken into account in determining whether a payment has a UK source for these purposes, including but not limited to:
- residence of the debtor (payer) and the location of their assets (regarded by HMRC as the most important factor);
- the residence of any guarantor;
- the location of any security for the debt;
- the place of performance of the contract and the method of payment; and
- the competent jurisdiction for legal action and the proper law of contract.
In the recent decision of the UK Court of Appeal (the “CoA”) in Ardmore the court upheld the earlier decision of the Upper Tribunal that a multifactorial test should be applied in determining UK source. The CoA found that a “practical” and “substantive” approach should be taken to determine whether the payment has a UK source (and the weight to be attached to the various factors) in light of all facts and circumstances (both singly and cumulatively); the test being whether “a practical person would regard the source as in this jurisdiction [the UK] or elsewhere”.
The CoA confirmed the importance of assessing all of the factors (in other words there are no irrelevant factors), albeit that certain factors may carry less weight than others. For instance, the CoA suggested that exclusive jurisdiction and governing law clauses, the creditor’s residence and place of credit may carry comparatively less weight, although that will depend on the facts and circumstances. This approach does somewhat cast doubt on HMRC’s view that the debtor’s (payer’s) residence is the most important factor when determining source.
Going forward, taxpayers will need to continue to take a practical view of all facts and circumstances to determine whether any payment of yearly interest has a UK source and, if so, consider the UK withholding tax implications.