Source of interest paid from the UK on a foreign loan

Ardmore was a UK-resident company owned and managed by two brothers. Its assets and activities were almost entirely in the UK. Using working capital Ardmore had subscribed for shares in two companies incorporated in the British Virgin Islands (BVI) and owned by Gibraltar trusts established by the brothers. The amount subscribed £1.35m was lent by the BVI companies to the trusts and by the trusts to Ardmore.

HMRC said the interest paid on the loan derived from a source in the UK so Ardmore should have deducted tax from it.

The First-tier Tribunal and Upper Tribunal rejected the taxpayer’s appeal.

The issue was how the source principle should be applied to interest paid on a foreign loan. Lady Justice Arden in the Court of Appeal said there was no universal test for applying the principle; in this case the test had been described as ‘multifactorial’ so requiring an overall assessment of the...