Ardmore Construction Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Sales,Lady Justice Arden,Lord Justice Leggatt |
| Judgment Date | 21 June 2018 |
| Neutral Citation | [2018] EWCA Civ 1438 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/0688 |
| Date | 21 June 2018 |
[2018] EWCA Civ 1438
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE MORGAN & JUDGE ROGER BERNER
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Sales
and
Lord Justice Leggatt
Case No: A3/2016/0688
Patrick Way QC (instructed by Sharpe Pritchard LLP) for the Appellant
Richard Vallat QC (instructed by HMRC's Solicitor's Office) for the Respondent
Hearing dates: 14 March 2018
Judgment Approved
This is an appeal by Ardmore Construction Limited (“Ardmore”) about the correct application of the “source” principle, that is the principle that tax is territorial and income tax, for instance, is only payable on income from a source in the UK (see now section 368 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), set out in paragraph 3 below). The principle is long-standing: see in Colquhoun v Brooks (1889) 14 App Cas 493, 504. The issue is how the source principle is to be applied to interest paid on a foreign loan in this case. There is no universal test for applying the source principle: in this case, using the language of the day, the test has been described as “multifactorial” and thus as involving an overall assessment of the situation.
This appeal is from the determination of the Upper Tribunal (Morgan J and Judge Berner) dated 20 November 2015. Mr Patrick Way QC appears for Ardmore and Mr Richard Vallat QC appears for HM Revenue and Customs (referred to below as “HMRC”). This judgment will set out some unusually long citations from three decided cases to see how courts have applied the principle in different circumstances. These citations are instructive in showing how the courts have attributed weight to different factors.
Legislative framework
The material provisions of section 874 of the Income Tax Act 2007 (“ITA”) and section 368 of ITTOIA are as follows:
874 Duty to deduct from certain payments of yearly interest
(1) This section applies if a payment of yearly interest arising in the United Kingdom is made—
(a) by a company,…
(b)
(2) The person by or through whom the payment is made must, on making the payment, deduct from it a sum representing income tax on it at the basic rate in force for the tax year in which it is made….
368 Territorial scope of Part 4 charges
(1) Income arising to a UK resident is chargeable to tax under this Part whether or not it is from a source in the United Kingdom.
(2) Income arising to a non-UK resident is chargeable to tax under this Part only if it is from a source in the United Kingdom.
(2A) …
(3) References in this section to income which is from a source in the United Kingdom include, in the case of any income which does not have a source, references to income which has a comparable connection to the United Kingdom.
(4) …
Background
The facts are agreed and are fully set out by the Upper Tribunal at paragraphs 69 to 80 of its judgment. A summary suffices here. Ardmore is a UK resident company owned and managed by two brothers. Its assets and activities are almost entirely in the UK. Using working capital, it subscribed for shares in two companies incorporated in the British Virgin Islands (“BVI”) and owned by Gibraltar trusts established by the brothers respectively. The detail of the trusts and the terms of the shares subscribed is immaterial. The sum of £1.35m, being a sum equal to the amount subscribed (by way of part payment of share premium) by Ardmore to the BVI companies, was lent by those companies to the trusts and by the trusts to Ardmore, in the latter case under a facility letter dated June 2005.
The terms as to interest and repayment of capital were unremarkable. The relatively unusual features of the loan were that (1) it was not required not to be supported by any UK security, (2) the facility letter and loan documentation were governed by the law of Gibraltar and the parties submitted to the exclusive jurisdiction of the Gibraltar courts, and (3) (although this did not happen) payments of interest were to be made in Gibraltar from a non-UK source.
HMRC determined that the interest paid on the loan was paid from a source within the UK and that Ardmore ought to have deducted tax from it. Ardmore appealed to the First-tier Tribunal (“FTT”). The Upper Tribunal heard the appeal in this case with that in Perrin v HMRC, another decision of the FTT, and the judgment of the Upper Tribunal relates to both cases. However, the latter appeal is not before this Court and I need not refer further to it.
Decisions of the First-tier and Upper Tribunals
Ardmore submitted that the appropriate test was that of the place where the lender was. By their decision dated 21 May 2014, the FTT (Judge Brooks and Mr Stafford) rejected Ardmore's appeal. They considered several cases on the source principle. For example, they applied the speech of Lord Nolan, giving the advice of the Privy Council in Commissioner of Inland Revenue v Orion Caribbean Limited (in voluntary liquidation) [1997] STC 923, where he found that the proposition enunciated by Lord Bridge in Commissioners of Inland Revenue v Hang Seng Bank Ltd [1991] 1 AC 306 PC to the effect that the source of income was always located in the place where money is lent could not stand with the line of authority establishing that the ascertaining of a source of income is a “practical hard matter of fact” (to use the words of Lord Atkin in Rhodesia Metals Ltd (in liquidation) v Commissioner of Taxes [1940] AC 774, 789). Lord Nolan held that:
No simple, single, legal test can be employed.
Ardmore appealed to the Upper Tribunal. Ardmore submitted that (1) the source of the interest could properly be found by ascertaining the nationality or residence of the relevant loan instrument, (2) if the proper test was the multifactorial test, the FTT erred by affording too much weight to the residence of the debtor, and (3) the source of the interest was the place where the credit was provided.
The starting point for Ardmore's submissions was that the underlying tax liability was that of the lender, and not that of the borrower. Ardmore submitted that the proper approach was to step back and ask whether the loan document was fundamentally a UK document or a foreign document.
The Upper Tribunal also considered several authorities, particularly Westminster Bank Executor and Trustee Co (Channel Islands) Limited v National Bank of Greece SA (1970) 46 TC 472 (“the National Bank case”), which was the only binding authority on the meaning of the statutory phrase “interest arising in the” UK. In that case, the source principle had to be applied to the following critical facts. Bearer bonds subject to English law, denominated in sterling and secured (on issue) on property in Greece were (following amalgamation and universal succession under Greek law) the subject of an unconditional guarantee by the National Bank (which was non-resident). The coupons fell to be paid by the guarantor through paying agents in London or at the option of the bearer of the coupon in Greece by cheque drawn on London. The funds to pay the interest would have to be remitted from Greece to London.
Lord Hailsham, with whom the other members of the House of Lords agreed, approached the matter experientially by weighing and comparing the factors, and this process has become known as the multifactorial test:
I have come to the conclusion that the source of the obligation in question was situated outside the United Kingdom. This obligation was undertaken by a principal debtor which was a foreign corporation. That obligation was guaranteed by another foreign corporation which, as was conceded before us, had at no time any place of business within the United Kingdom. It was secured by lands and public revenues in Greece. Payment by the principal debtor of principal or interest to residents outside Greece was to be made in sterling and either at the offices of Hambros Bank or Erlangers Ltd or (at the option of the holder) at the National Bank of Greece in Athens, Greece, by cheque on London. Whichever method of payment was selected it was pointed out before us that, whatever use were made of the option, discharge of the principal debtor's obligation would have involved in the ordinary course either a remittance from Greece to the paying agents specified in the bond or, at the option of the holder, a cheque issued within Greece although drawn on London and presumably payable there out of funds remitted by the debtors from abroad. It was also pointed out that the bond contained no provision for payment by the guarantor at any particular place or in any particular country. The only circumstances relied on by the appellants as supporting their contention that the obligation was located inside the United Kingdom were as follows. Although the original guarantor had no branch in the United Kingdom the appellants had acquired one, on the universal succession in London. Moreover it was urged that since discharge of the obligations under the bond in Greece had been caught by the moratorium enacted by the Greek government, it followed that the only place at which the obligation could have been discharged or enforced was in London. Speaking for myself, I do not see how an obligation originally situated in Greece for the purposes of British income tax could change its location either by reason of the fact that one guarantor had been substituted for another, or by the fact that the second guarantor so substituted subsequently acquired a London place of business or by the fact that the government of Greece had by retrospective legislation altered by moratorium and substitution of a new guarantor...
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