A UK construction company has lost its appeal at the Court of Appeal (CoA) on not withholding income tax (WHT) from the payment of interest to overseas providers of finance. The UK company subscribed for shares in two companies incorporated in the British Virgin Islands (BVI) and paid £1.35m for these shares. The BVI companies the lend the funds to Gibraltar trusts (established by the same two brothers that owned the UK company). The Gibraltar trusts then lent the £1.35m back to the UK company with the hoped-for end result that interest income could accrue to the Gibraltar trusts that could then be distributed to beneficiaries free of WHT irrespective of the ability to offset the WHT against UK income tax payable.
The Gibraltar were trusts established under the law of Gibraltar with Gibraltar trustees, making the trusts resident in Gibraltar. The loan documentation between the UK company and the trusts stated that the law of Gibraltar governed the relationship and that funds were to be paid to Gibraltar bank accounts and that no UK assets secured the loans.
The UK company held that this meant the income arising under the loans had a Gibraltar source and not a UK source and therefore there was not requirement for it to charge WHT on payments of interest to the Gibraltar trusts.
Previous WHT cases have stated that tribunals and courts must perform a multifactorial test when considering the source of interest income, the leading case being the National Bank of Greece case where it was held that despite payment being drawn in London that the source of the income was outside of the UK and therefore WHT was not to be withheld.
The lower tribunals had performed this multifactorial test and found that the jurisdiction of the loan documents and the residence of the debtor were not as important as the location of the creditor and the assets and profits that would be used to repay capital or interest. These were all in the UK and so the source of income was the UK.
The CoA held that they couldn’t interfere with the lower tribunals approach to the multifactorial test as those tribunals hadn’t erred in law in any significant way. They dismissed the appeal with the UK company liable for WHT not withheld.
The decision can be found at: Ardmore Construction Ltd v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
Manging withholding tax on interest and royalties can be a complex matter and many businesses can expose themselves to tax risks without a robust analysis of the transactions involved. This is a subject matter that we are experienced with and will gladly help with advice or compliance matters. Please contact us if you have any questions.
