Court of Appeal judge Lady Justice Arden confirmed that, as previous case law had decided, the correct test involved considering a range of different factors (a 'multifactorial' approach). "The correct approach is the practical approach and … it is not merely multifactorial but also acutely fact-sensitive. The court or tribunal must examine all the available facts both singly and cumulatively," she said.
The court said that the lender's place of residence and the place of credit were not irrelevant as HMRC had argued, as "on a multifactorial test a factor is still relevant even if it carries little weight".
"The case confirms that there is no straightforward 'rule of thumb' test for determining whether interest has a UK source. The weighting given to factors such as the place of residence of the lender will be very fact specific, involving an assessment of the scale of activities actually carried on in the jurisdiction in question," said Jeremy Webster, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.
Ardmore had subscribed £1.35m for shares in two British Virgin Islands (BVI) companies that were owned by the Gibraltar trusts, which had been established by the two brothers who owned Ardmore. The BVI companies lent the £1.35m to the trusts, which then lent the sum to Ardmore.
If a company pays yearly interest ‘arising in the UK’ it is obliged to deduct basic rate tax and pay it to HM Revenue & Customs (HMRC), unless an exemption applies. Ardmore argued that the interest was not UK source but HMRC disagreed and said that basic rate tax should have been deducted from it.
Both the First-tier Tribunal and the Upper Tribunal decided that the interest had a UK source. Ardmore appealed to the Court of Appeal arguing that the source of the interest was Gibraltar, the place of residence of the creditors and that although many factors had to be considered, the Upper Tribunal had not given sufficient weight to the place of residence of the creditors and had given too much weight to the debtor's place of residence.
"In this case… the conclusion of the Upper Tribunal that the residence of the creditor should carry little weight cannot be criticised," said Lady Justice Arden, dismissing Ardmore's appeal.
"The immediate search is for the source of the interest rather than a search indirectly for the source of the loan. The funds paid over as interest derived from funds generated in the UK. The activity of lending became passive once the loan was made, whereas the business of Ardmore was actively conducted to produce those funds. There was no default and the Gibraltarian exclusive jurisdiction and governing law clauses would only matter if there was default. The importance of those clauses is also undermined by the fact that the enforcement of any judgment following default on assets of Ardmore would be in the UK (and it is not necessary to go further than to note that all the available assets to meet the liabilities to the lender were in the UK)," she said.
"Furthermore, relative to the links with the UK, the links with Gibraltar were of an insubstantial kind: there was no evidence that they were backed up by any kind of other activity within Gibraltar, nor was it explained why it was necessary for the trusts to form companies in the BVI or what commercial purpose those companies served," she said.
However, the judge said that "the evaluative nature of the exercise of applying the source principle" means that an appeal court of tribunal should be "slow to interfere".
"Consequently, in my judgment, Ardmore has to satisfy this Court that the Tribunals were wrong in the sense that 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," Lady Justice Arden said.