Court Case Arguably Clarifies UK Source Rules With Respect To Interest

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A recent case heard by the First Tier Tribunal serves as a reminder of the complexities that surround the UK's regime for deduction of tax from interest paid.
United Kingdom Tax

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.

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