A recent case heard by the First Tier Tribunal (the junior UK
tax tribunal) serves as a timely reminder of the complexities that
surround the UK's regime for deduction of tax from interest
paid. In general, the payer of UK-source interest to a recipient
outside the UK is required to withhold 20 percent from the
interest. This obligation can be reduced (either in whole or in
part) under the terms of a tax treaty entered into by the UK. The
recent decision, Andrew Collins Perrin v the Commissioners for
Her Majesty's Revenue and Customs, although decided in
favor of HMRC rather than the taxpayer, arguably clarifies how the
question of whether interest has a UK source will be decided.
The source of the interest is to be distinguished from the situs
of the debt. It is relatively easy to identify the situs of the
debt—usually the place of residence of the debtor—but
UK courts have consistently refused to identify the source of the
interest with the situs of the debt. Instead, a number of factors
must be weighed. The tribunal clarified which factors carry the
most weight in determining the source of the interest. The most
important factors are : the residence of the debtor, the location
of any security, and the place where the debt can be enforced.
Others, for example the place where the interest is contractually
stipulated to be paid, are less important and in some cases
completely irrelevant.
The Andrew Collins Perrin case serves as useful reminder
that interest paid between two non-UK bank accounts can nonetheless
have a UK source and therefore require the payer to deduct UK tax
at 20 percent. Even if the recipient is in a country that has a
double tax treaty with the UK, reduced withholding under such
treaty is possible only if the payer has first received a direction
from HMRC authorizing payment gross or deduction at less than the
full 20 percent UK rate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
