Fenlo Limited v Her Majesty's Revenue & Customs, SPC 00714

Spc00714

LOAN RELATIONSHIP – RELEASE – PARAGRAPH 5(3), SCHEDULE 9, FINANCE ACT 1996 – EFFECT OF COVENANTS IN LOAN AGREEMENT – DOES LENDER CONTROL BORROWER FOR PURPOSES OF SECTION 87A FINANCE ACT 1996 – NO – AMOUNT RELEASED BROUGHT INTO CHARGE

FENLO LIMITED Appellant

- and -

Special Commissioner: Nicholas Aleksander

Sitting in public in London on 14 October 2008

Oliver Conolly of counsel for the Appellant

Mark Harrison, HM Revenue & Customs Appeals Unit for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1. The point at issue in this matter is the treatment of the release of part of a loan which had been made to the Appellant, Fenlo Limited (“Fenlo”). It is common ground that the loan falls within the loan relationships legislation in Finance Act 1996, and that the amount released is to be brought into account in computing Fenlo’s profits, unless one of the exceptions in the legislation applies. Fenlo contends that it was connected with the lender, and the release is therefore not to be brought into account by virtue of paragraph 5(3), schedule 9, Finance Act 1996. The Revenue contend that Fenlo and the lender were not connected and that no other exemption applies.

2. I heard evidence from Mr Sidney Taylor, company secretary of Fenlo. In addition a statement of facts not in dispute and a bundle of documents were submitted at the hearing by the Revenue.

3. In 1981 Mr Taylor bought 198 Hagley Road, Birmingham. This was a large semi-detached house which Mr Taylor converted into a small hotel/guesthouse. It was also his family’s home. In 1986 the opportunity arose to purchase the adjoining property, 200 Hagley Road, which was done with the aid of a loan from Mr Teddy Yip, a long standing business associate of Mr Taylor. For reasons which are not wholly clear, Mr Yip was not prepared to lend the money to either Mr Taylor or any company which he controlled. Fenlo was therefore incorporated with Mrs Naomi Taylor (Mr Taylor’s wife) and Ms Tracey Mary Taylor (Mr Taylor’s daughter) as the only shareholders and directors. Mr Taylor was the company secretary. Fenlo’s articles of association incorporated Table A with some modifications. Article 70 of Table A was incorporated without amendment, this provides that the business of the company shall be managed by the directors, who may exercise all the powers of the company.

4. Fenlo purchased 200 Hagley Road at a price of £500,000, using a loan of £500,000 from Mr Yip. Fenlo also purchased 198 Hagley Road from Mr Taylor for £200,000, which was paid to Mr Taylor in instalments over a number of years. Building work was undertaken to join 198 and 200 Hagley Road and convert them into a hotel; a link building was subsequently added at the rear. Approximately £100,000 was spent on joining the buildings and converting them into a hotel, and approximately £450,000 to £500,000 was spent on the link building. All these works were financed by loans from Mr Yip.

5. It was only in 1992 that the loans were formally documented. The documentation took the form of a facility letter dated 19 October 1992 from Brinkley Investments Inc (“Brinkley”) to Fenlo, and a debenture of the same date charging the undertaking and assets of Fenlo by way of security for the loan. Brinkley was a company incorporated in the Bahamas, but which was managed by Coutts in Guernsey. It would appear from Mr Taylor’s evidence that Brinkley was a company under the ultimate control of Mr Yip.

6. On 19 October 1992, Fenlo drew down £1,200,000 under the facility letter, and – I assume (although there is no clear evidence on the point) – used these funds to repay the loans owing...