Case: Source of interest where activity to generate payment sited

[2018] EWCA Civ 1438


Judge LJ Arden, LJ Sales and LJ Leggatt

Decision released 21 June 2018

ITA 2007, s. 874 – ITTOIA 2003, s. 368 – Perrin [2014] TC 03614 – Council in IR Commsr (Hong Kong) v Orion Caribbean Ltd (in voluntary liquidation) [1997] BTC 385 – IR Commr (Hong Kong) v Hang Seng Bank Ltd [1990] BTC 482 – Liquidator, Rhodesia Metals Ltd (in liquidation) v Commissioner of Taxes (South Africa) [1940] AC 774, 789 – Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970) 46 TC 472 – IR Commr v NV Philips Gloeilampenfabrieken [1955] NZLR 868

Ardmore Construction Ltd v R & C Commrs [2018] BTC 27


The Appeal concerned the correct application of the ‘source’ principle, that is the principle that tax is territorial and income tax. The issue was how the source principle is to be applied to interest paid on a foreign loan.

The Appellant was a UK resident company owned and managed by two brothers. Its assets and activities were virtually all in the UK. The Appellant had subscribed for shares in two companies incorporated in the British Virgin Islands and owned by Gibraltan trusts established by the brothers. The sum of £1.35m, being a sum equal to the amount subscribed (by way of part payment of share premium), was lent to the trusts and by the trusts to the Appellant under a facility letter dated June 2005.

HMRC determined that the interest paid on the loan was paid from a source within the UK and that tax should have been deducted from it.

It was agreed that the correct test was the multifactorial test it resulted in different indications as to different sources. The correct approach to applying the multifactorial test was to ask whether a practical person would regard the source in a particular jurisdiction. HMRC emphasized the need to have regard to the underlying commercial reality.

The analysis led to a further point of consideration: Given the evaluative nature of the exercise of applying the source principle means that the tribunal should be slow to interfere. The Appellant had to satisfy the Court that the Tribunals were wrong – either they left a material factor out of account or took a matter into account that should have been left out, or misdirected themselves in law or fact or reached a perverse conclusion.

Funds paid over as interest derived from funds generated in the UK. The Appellant’s business was actively conducted to produce those funds.

It was held that in the circumstances there was no basis to which the court could interfere, and the Appeal was dismissed.


The case is a reminder of the core principles that charge UK source income to tax. However, planning has existed that suggest there is no tax at source and this case may remind those using such planning that the actual test considers the origin of where the interest is serviced in the mind of a practical person.

For further commentary on income received under deduction of tax, see Direct Tax Reporter at ¶110-700.

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