The First-tier (tax) Tribunal has recently on two separate occasions considered whether loan interest has a UK 'source', and is therefore subject to UK withholding tax. The leading case on source of interest for UK tax purposes was decided over 40 years ago1, and it is rare to see the issue brought before the Tribunal.
In the most recent case (Ardmore Construction Ltd v HMRC2) the Tribunal held that interest paid by a UK company from UK trading profits had a UK 'source', despite the fact the interest arose on a loan from an offshore trust. The Tribunal agreed with HMRC that case law supported a multi-factorial approach to determining the issue of 'source' of interest (on which, see below).
Earlier in the year (in Perrin v HMRC3) the Tribunal similarly held that the fact that interest was paid by a UK company, from UK funds, and the creditor would likely seek to enforce the debt in the UK (if required) outweighed the fact that the loan agreement gave jurisdiction over any dispute to the Isle of Man courts and that the interest was actually paid outside of the UK (in that particular case, from one bank account in the Isle of Man to another).
In both cases, the fact that the interest-paying debtor company was UK resident was held to be the most important factor, resulting in the interest payments being subject to UK withholding tax at source, at a rate of 20%.
This is in line with HMRC's published guidance which states that, although the question of source of interest depends on a range of factors, HMRC regard the residence of the debtor and the location of his assets as the key factor.
Although neither case resulted in a surprising decision, they reaffirm the approach to be taken to determining the 'source' of interest for tax purposes (and support HMRC's published position).