Esprit Logistics Management Limited, Mr Graham Dixon, OCUK Limited (formerly ESNET Limited), Michon Limited, Ripple Developments Limited, Mr David Wolfenden v The Commissioners for Her Majesty's Revenue & Customs, TC 06517
| Jurisdiction | UK Non-devolved |
| Judge | Swami RAGHAVAN |
| Judgment Date | 31 May 2018 |
| Neutral Citation | [2018] UKFTT 0287 (TC) |
| Respondent | The Commissioners for Her Majesty's Revenue & Customs |
| Appellant | Esprit Logistics Management Limited, Mr Graham Dixon, OCUK Limited (formerly ESNET Limited), Michon Limited, Ripple Developments Limited, Mr David Wolfenden |
| Reference | TC 06517 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0287 (TC)
TC06517
Appeal number: TC/2015/03059 &TC/2015/04240 & TC/2015/06537 &
TC/2015/03836
TC/2015/03061 & TC/2015/03062
TC/2015/03099 & TC/2015/04488
TC/2015/03100 & TC/2015/04241 & TC/2015/03838
INCOME TAX– close company – directors’ loan waiver scheme - whether
release of debt for purposes of s415 ITTOIA tax charge – no – appeal
dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
(1) ESPRIT LOGISTICS MANAGEMENT LIMITED
(2) MR GRAHAM DIXON
(3) OCUK LIMITED (FORMERLY ESNET LIMITED)
(4) MICHON LIMITED
(5) RIPPLE DEVELOPMENTS LIMITED
(6) MR DAVID WOLFENDEN
Appellants
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
Respondents
REVENUE & CUSTOMS
TRIBUNAL:
JUDGE SWAMI RAGHAVAN
Sitting in public at Taylor House, London on 17-19, and 22-26 January 2018
Michael Jones, counsel for the Appellants instructed by RPC
Akash Nawbatt QC and Kate Balmer, counsel, instructed by the General Counsel
and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2018
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DECISION
Introduction
1. The appeals covered by this decision concern the income tax and corporation tax
treatment of a scheme which involved releases of loan balances on the director’s loan
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account of close companies. There are four sets of appeals, two of which involve only
the close company (OcUK Limted and Michon Limited) and two which involve both
the close company and one of its directors (Esprit Logistics Management Limited and
its director Mr Graham Dixon, and Ripple Developments Limited and its director Mr
David Wolfenden).
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2. The documentation underlying the arrangements followed a very similar format.
A board minute explained the company’s wish to release sums owing by the director
by way of a bonus for the director’s services to the company. A deed was accordingly
executed setting out the sums released. The company paid NICs but not employment
income tax on the released amounts and deducted the sums released from its taxable
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profits.
3. In brief, the appellants argue the amounts released were taxable in the hands of
the directors under s415 Income Tax (Trading and other Income) Act 2005 (“ITTOIA”)
at the dividend ordinary rate, rather than taxable as HMRC contend as employment
income under Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
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HMRC argue the waiver of the loan, was, in reality, a reward for the directors’ services.
They say s415 ITTOIA is not in issue, and in any case construed purposively, does not
apply to the facts viewed realistically and commercially. The loan waiver was simply
the mechanism for the delivery of a performance based bonus by way of set-off.
Alternatively, HMRC argue, that even there were such a “release” for s415 purposes,
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then s415 ITTOIA does not have priority over the charge to employment income under
Part 2 of ITEPA. The appellants say the legislation clearly accords the ITTOIA charge
priority over the ITEPA charge. They concede however that if s415 ITTOIA does not
apply, or that if they wrong in arguing the ITTOIA charge took priority over the ITEPA
charge, then the sums would be taxable under s62 ITEPA.
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4. As regards corporation tax, HMRC say that if, contrary to their primary case, the
sums are not chargeable as employment income, then the sums are not deductible by
the companies; arguing the loan was not a “loan relationship” of the company (s81
Finance Act 1996 and s302 Corporation Taxes Act 2009), or that if it were, the debits
brought into account by the company should be nil (paragraph 11 of Schedule 9 Finance
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Act 1996 and s444 Corporation Tax Act 2009).
5. The appeals concern determinations under regulation 80 of the Income Tax
(PAYE) Regulations 2003 (“Regulation 80 Determinations”) and corporation tax
closure notices (“Corporation Tax Closure Notices”) issued variously by HMRC
against the appellants in the tax years 2006/07 to 2009/10. The specific years and
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amounts in issue are detailed below.
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6. Esprit appeals: (i) a Regulation 80 Determination of 4 October 2011, in the sum
of £114,840.60; (Esprit Logistics Management Ltd also appeals a corporation tax
Discovery Assessment issued under paragraphs 41 to 46 of Schedule 18 Finance Act
1998 (appeal reference TC/2015/06537). The issue of the validity of that assessment
has been stayed pending the outcome of this hearing pursuant to tribunal directions of
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19 June 2017. (ii) A Corporation Tax Closure Notice for the year ended 30 September
2009 dated 19 August 2014. Mr Dixon also appeals a Section 9A TMA enquiry closure
notice of 7 August 2014.
7. OcUK appeals: (i) a Regulation 80 Determination, dated 1 February 2011, for the
tax year 2006/07 in the amount of £1,193,744.40; and (ii) a Corporation Tax Closure
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Notice, dated 21 August 2014, for the tax year 2006/07.
8. Michon appeals: (i) a Regulation 80 Determination, dated 1 February 2011, for
the tax year 2006/07 in the amount of £114,338.40; and (ii) a Corporation Tax Closure
notice, dated 27 March 2014, in respect of the tax year 2007.
9. Ripple appeals: (i) a Regulation 80 Determination dated 4 October 2011 in the
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sum of £60,836.70 for the tax year 2007/08; and (ii) a Corporation Tax Closure Notice,
for the tax year 2007, dated 1 August 2014. Mr Wolfenden also appeals a Section 9A
TMA enquiry closure notice for the tax year ended 5 April 2008 dated 5 August 2014.
10. The tribunal heard evidence from a number of appellant company directors, each
of whom had served witness statements in advance exhibiting various documents such
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as directors loan account details, board minutes and correspondence which included
letters of advice from the scheme structurer. The witnesses were called in the following
order Jeff Michon and Tony Michon (Michon Limited), David Wolfenden (Ripple
Developments Limited), Mark Proudfoot (OcUK Limited) and Graham Dixon (Esprit
Logistics Management Limited). While I was satisfied that each of the witnesses gave
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their recollections honestly, given the length of time that had passed since the relevant
events, some aspects of those recollections, as will be seen when various contested
issues of fact are discussed later, were not reliable or were accorded less weight.
Law
11. I gratefully adopt, with some minor modifications, the explanation of the relevant
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statutory provisions which the parties had set out in their skeleton arguments.
Income Tax
ITTOIA
12. The five Parts of ITTOIA bring into charge to tax “trading income”, “property
income”, “savings and investment income” and “certain miscellaneous income”. Part 4
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of ITTOIA deals with the taxation of “Savings and Investment Income” and charges
tax on income such as interest, dividends, gains from annuities and insurance. Under
Chapter 6 of Part 4 there is a charge to income tax on the release of loans to the
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