Esprit Logistics Management Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 May 2018 |
| Neutral Citation | [2018] UKFTT 287 (TC) |
| Date | 31 May 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0287 (TC)
Judge Swami Raghavan
Michael Jones, counsel appeared 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, appeared for the respondents
Income tax – Close company – Directors' loan waiver scheme – Whether release of debt for purposes of ITTOIA 2005, s. 415 tax charge – No – Appeal dismissed.
The First-Tier Tribunal (FTT) found that there was no release of loan by the close company appellants for the purposes of ITTOIA 2005, s. 415 in respect of a directors' loan waiver scheme.
The appeals covered by this decision concerned the income tax and corporation tax treatment of a scheme which involved releases of loan balances on the director's loan account of close companies. There were four sets of appeals, two of which involved only the close company (OcUK Limted and Michon Limited) and two which involved 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).
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 profits.
In brief, the appellants argued the amounts released were taxable in the hands of the directors under ITTOIA 2005, s. 415 at the dividend ordinary rate, rather than taxable as HMRC contended as employment income under ITEPA 2003, Pt. 2. HMRC argued the waiver of the loan, was, in reality, a reward for the directors' services. They said s. 415 ITTOIA 2005 was not in issue, and in any case construed purposively, did 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 argued, that even there were such a “release” for s. 415 purposes, then s. 415 ITTOIA 2005 did not have priority over the charge to employment income under Pt. 2 of ITEPA 2003. The appellants said the legislation clearly accorded the ITTOIA charge priority over the ITEPA charge. They conceded however that if s. 415 ITTOIA 2005 did not apply, or that if they were wrong in arguing the ITTOIA charge took priority over the ITEPA charge, then the sums would be taxable under s. 62 ITEPA 2003.
As regards corporation tax, HMRC said that if, contrary to their primary case, the sums were not chargeable as employment income, then the sums were not deductible by the companies; arguing the loan was not a “loan relationship” of the company (s. 81 FA 1996 and s. 302 CTA 2009), or that if it were, the debits brought into account by the company should be nil (para. 11 of Sch. 9, FA 1996 and s. 444, CTA 2009).
The appeals concerned determinations under reg. 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 amounts in issue are detailed below.
Each of the appeals related to a remuneration planning scheme promoted by Tenon Limited and/or Premier Strategies Limited (“PSL”) which was known as the “loan waiver scheme”. Tenon Limited subsequently became known as Premier Strategies (PSL). Depending on the time period in issue the documents and evidence referred to one or other of the two names but nothing turned on that distinction. The scheme implementation followed the same pattern in each appeal. For convenience this decision set out the terms of the documents in relation to Michon Ltd, whose directors were the first to have evidence heard from, in more detail.
The business of the company, which was founded by Jeff Michon, was to provide creative design and marketing services predominantly to large corporate firms and small and medium-sized enterprises. At all material times, Jeff Michon was the Managing Director of Michon Limited and his brother Tony Michon was the Creative Director. In his role as Managing Director, Jeff Michon had oversight of the whole company, but his main responsibilities were the finances and management of the business. On incorporation in 1998, the assets of the business were transferred to the company. This included fixtures, debtors and work in progress as well as funds in the bank. This was done by crediting the directors' respective loan accounts. Over the following years, as the company began to generate more funds, Jeff and Tony Michon took the opportunity to withdraw money from their director's loan accounts or occasionally charge private expenditure to this. The director's loan accounts operated in the manner of a current account or running account between the directors and the company.
As the business grew, in or around 2003/2004, Jeff and Tony tried to find somewhere suitable that they could buy and refurbish as they needed more space. Once the Michons had identified the Old School Rooms, they approached their accountants, Newby Castleman, to seek advice, although this was not immediately after they had found the Old School Rooms. They were initially interested in a number of properties, including the Old School Rooms, and there was a period of some months between them finding the Old School Rooms and the decision to proceed to try to purchase it.
At their initial meeting with Tenon the possibility of the waiver of director's loans was brought to their attention as a tax efficient way of releasing the funds to repay their extended mortgages and finance the refurbishment of the Old School Rooms. They only met with Tenon on a couple of occasions. The first was the initial meeting where the loan waiver proposal was discussed, and the second was to sign the relevant paperwork ordering of the issues for determination, which it is necessary to address at the outset. HMRC's starting point was their argument that the so-called waiver of the loan was, in reality, simply a reward for the director's services and chargeable as employment income (within the meaning of s. 62 ITEPA 2003) under s. 9 ITEPA 2003. The scheme of arrangements was the mechanism for the delivery of bonuses which were taxable as employment income. It was not necessary to consider other charging provisions. The appellants maintained the starting point is nevertheless to consider whether s. 415 ITTOIA 2005 applied, as they argued, because there was a “release” of the director's loan and then considered whether, as they maintained, s. 415 ITTOIA 2005 has priority over the charge to income tax under ITEPA. The appellants accepted the release is capable of falling within the definition of earnings in s. 62 ITEPA 2003. However, the difficulty highlighted by the appellants with HMRC's starting point was that it assumed either s. 415 ITTOIA 2005 has no application or that, if the ITTOIA charge did apply, that ITEPA nevertheless took priority or otherwise excludes s. 415 ITTOIA 2005.
Having reflected on the parties' arguments it was not clear to the First-tier Tribunal (FTT) what further basis there was, over and above the arguments around statutory priority as between ITEPA and the s. 415 ITTOIA 2005 charge (that would only need to be addressed if s. 415 was found to be applicable on the facts), for HMRC's submission, that if the payment was earnings under s. 62 ITEPA, no other charge was relevant. Noting the concession made by the appellant the FTT agreed that the appropriate starting point is to consider the s. 415 ITTOIA 2005 issue. The FTT should also have recorded that further to the parties' request, the decision on the various issues was to be given in principle, and that no determination was sought, at this stage, in relation to whether, if an employment income charge was in issue, the relevant amounts were subject to PAYE.
The case put forward (by Mr Jones) on behalf of the appellants was straightforward. He argued the s. 415 charge was a sui generis charge which applied when certain conditions are fulfilled, namely when the loan referred to was released by the company. The term “release” bore its ordinary meaning. In each case the deed of release unambiguously provided that the company would release the director from any liability to repay the full amount to the company.
The term “release” did not cover repayment or satisfaction of the loan. The term was not confined to gratuitous releases or releases for less than full consideration. A novation did not amount to repayment or satisfaction. What the parties differed on however was the extent to which a purpose might be drawn from the provision, and in how the provision applied to the particular facts of the appeals in question.
On the facts of each of the appeals the transaction which took place between the company and the director amounted to a repayment of the relevant loan. The FTT therefore concluded the appellant companies did not release the loans for the purposes of the s. 415 ITTOIA 2005 charge. The appellants conceded that, if the s. 415 charge does not apply, the sums are taxable under s. 62 ITEPA. That concession was rightly made in the FTT's view.
The appellants' case, that a charge under s. 415 ITTOIA 2005 (which was in Ch. 6 Pt. 4 of ITTOIA 2005) had priority over a charge under Pt. 2 of ITEPA 2003 rests on an exclusion in s. 366 ITTOIA 2005. Were it necessary to decide to issue, the FTT would not be satisfied HMRC's case demonstrated why it was the ITEPA provisions had priority despite the Ch. 10 references in s. 366 which suggested otherwise.
Were it necessary to decide the issue, the FTT would have found the...
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