Ardmore Construction Ltd v The Commissioners for HMRC

The source of interest for UK income-tax purposes is determined by a practical, multifactorial and acutely fact-sensitive assessment. The court must examine all available facts, singly and cumulatively, and ask where a practical person would regard the real source of the interest as lying. No single factor, including debtor or creditor residence, place of lending, governing law or place of payment, is automatically decisive. A factor may remain relevant although it carries little weight. Appellate tribunals should be slow to interfere with such evaluative findings, particularly where made by specialist tax tribunals. Authorities decided under different statutory regimes must be approached cautiously.

Ardmore, a UK-resident construction company, borrowed £1.35 million through arrangements involving British Virgin Islands companies and Gibraltar trusts. The loan documents were governed by Gibraltar law, subject to exclusive Gibraltar jurisdiction, and contemplated payment of interest in Gibraltar. Ardmore’s business, assets, bank accounts and funds used to pay the interest were in the UK.

HMRC determined that the interest arose from a UK source and that Ardmore should have deducted tax under the Income Tax Act 2007. The First-tier Tribunal dismissed Ardmore’s appeal. The Upper Tribunal upheld that decision: [2015] UKUT 633 (TCC). The central issue before the Court of Appeal was how the multifactorial source principle applied to interest on a foreign loan and whether the tribunals’ evaluation could be disturbed.

1. Appeal dismissed. Arden LJ dismissed the appeal. Sales LJ and Leggatt LJ agreed.
2. Statutory framework. The duty under section 874 of the Income Tax Act 2007 depended on whether the yearly interest arose in the UK. Section 368 of the Income Tax (Trading and Other Income) Act 2005 provided the relevant statutory expression of the territorial source principle.
3. Source principle. Following Westminster Bank Executor and Trustee Co (Channel Islands) Limited v National Bank of Greece SA (1970) 46 TC 472, the inquiry was multifactorial. Arden LJ adopted the practical approach described in Rhodesia Metals Ltd (in liquidation) v Commissioner of Taxes [1940] AC 774. The court must examine all available facts, singly and cumulatively, and assess the underlying commercial reality. The inquiry is acutely fact-sensitive and has no universal single-factor test. Decisions under different statutory regimes require caution.
4. Relevant factors and appellate review. A factor remains relevant even if it carries little weight. The creditor’s residence and place of credit therefore should not have been described as irrelevant, although the Upper Tribunal was entitled to give them little weight. An appellate tribunal should be slow to interfere with an evaluative assessment by specialist tribunals. Intervention requires omission of a material factor, reliance on an immaterial factor, a misdirection in law or fact, or a perverse conclusion.
5. Application. The funds used to pay the interest were generated by Ardmore’s active UK business. The lending activity was passive after the loan was made. The Gibraltar governing-law and jurisdiction clauses mattered principally on default, while enforcement would have been against Ardmore’s UK assets. The Gibraltar connections were insubstantial and unsupported by evidence of substantive activity or a commercial purpose for the BVI companies. The interest therefore arose from a UK source. The capital-gains situs rule in section 275(1) of the Taxation of Capital Gains Act 1992 shed no light on the income-tax inquiry. The decision in Commissioner of Inland Revenue v NV Philips Gloeilampenfabrieken [1955] NZLR 868 (NZ CA) could not mandate the result on materially different facts.

• Court of Appeal (Civil Division): On 21 June 2018, dismissed Ardmore’s appeal.
• Upper Tribunal (Tax and Chancery Chamber): Dismissed Ardmore’s appeal and upheld the First-tier Tribunal’s decision in the judgment dated 20 November 2015, [2015] UKUT 633 (TCC).
• First-tier Tribunal: Dismissed Ardmore’s appeal against HMRC’s determination on 21 May 2014.