Source of Income

Question 1

FL Smidth and Co v Greenwood (1920)

Answer 1

source of business income – trading ‘in’ the UK or trading ‘with’ the UK. Held the place where contracts
concluded is an important factor to determine whether there is a trading activity occurring in the UK (although it is not the only consideration).

The key issue was to determine “where.….the operations take place from which the profits in substance arise.”

Use: source of business income; connecting factors; how does double tax arise

Question 2

Firestone Tyre and Rubber Co (1957)

Answer 2

builds on cases to determine source of income. Place where contracts made is important but key is where in
substance the business takes place.

In this instance UK sub of a US firm – the UK sub manufactured tyres. Under the agreement between the two, it fulfilled orders obtained by European agents of the parent company. The purchasers paid the UK
company, which credited the parent company with the sale price less its own costs plus 5%.

The House of Lords held that the US Co was trading in the UK and that the UK subsidiary was acting as its agent in this trade.

Use: source of business income; connecting factors; how does double tax arise

Question 3

Westminster Bank Executor & Trustee Co v National Bank of Greece (the ‘Greek Bank’ case) (1970)

Answer 3

source of interest income – need to consider various
factors: residence of debtor, place of performance of contract, method of payment, jurisdiction for legal enforcement, residence of guarantor, location of
the security (ie. assets) on which debt is secured.

There is no one key determinant, but residence of the debtor is considered very important. A combination of the above will indicate, on the facts, where the source of the interest income is considered to be.

Facts: London branch of a Greek bank, paying interest on bearer bonds as guarantor of the bonds, which were issued by a Greek debtor (Greek bank), the
funds used to the pay the interest came from Greece, the debt was originally secured on land in Greece.

Held: the interest had a foreign (non-UK) source.

Use: connecting factor – source; UK approach to source of interest; how does
double tax arise.

Question 4

Perrin v HMRC [2014] & Ardmore v HMRC [2014]

Answer 4

These cases consider the approach taken to determining source of investment income, here interest, as seen in the Greek Bank case (Westminster
Bank Executor and Trustee Co v The National Bank of Greece SA) discussed above.

In both cases the salient facts were that: the interest was paid by a person who was resident in the UK to a non-lender; the loans in question were governed
by non-UK law and the parties had submitted to the exclusive jurisdiction of the non-UK courts; and the loans were unsecured.

In Perrin the interest payments were made from an Isle of Man bank account, in Ardmore they were made from a UK account.

Whilst the basic rule that a debt is situated where the debtor resides was considered in both cases the tribunal took the multifactorial approach as seen in
the Greek Bank case, where various factors are considered, which includes but is not limited to, the residence of the debtor. Thus other factors such as where the debt is paid, where the security for the debt is, and where the source of funds for the interest payable is found, were considered.

In both cases there were more factors pointing to the UK as the source of interest and so the tribunal in both cases found the UK was such source. Confirmed an appeal to the Upper Tribunal.

Use: source of investment income, application of the multifactorial approach over the pure ‘where debtor resides’ rule in UK case law