A Guarantor v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 05 August 2008 |
| Date | 05 August 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Colin Bishopp
The taxpayer in person
Colin Smith of their Eastern England Appeals Unit for the Respondents
Income tax - director's personal guarantee of company's debts - director resigned from directorship and left company - guarantee then called on - whether payment made by director an allowable deduction - ITEPA 2003 Income Tax (Earnings and Pensions) Act 2003 section 336s. 336 - whether conditions satisfied - no - appeal dismissed
A payment by the taxpayer on his personal guarantee as the director of a company was not an allowable deduction under Income Tax (Earnings and Pensions) Act 2003 section 336 subsec-or-para 1ITEPA 2003, s. 336(1) since it was not incurred wholly, exclusively and necessarily in the performance of the duties of his employment.
The taxpayer was a director of a company, and held five per cent of its issued shares. In 2002 the company found itself in acute financial difficulty and in September it entered into a debt factoring agreement with a commercial factor. It was a condition of the agreement that the directors entered into personal guarantees in amounts which were proportionate to their respective shareholdings. The company failed and the taxpayer's guarantee was called upon. Eventually the taxpayer made a payment to the factor of £10,925, with interest of £447 and legal costs of £1,600.
In his tax return for the year to 5 April 2005 the taxpayer claimed a deduction for expenses of the aggregate amount he had paid, £12,972. Following an enquiry the Revenue issued a closure notice by which the claim was disallowed and the taxpayer's return amended accordingly. He appealed against that decision.
The taxpayer contended that, as a director of the company, he was obliged to enter into the guarantee. The company was in financial difficulty and had exhausted all other possible sources of finance. He had a duty, as a director, to its creditors, employees and, after them, its shareholders to maintain the company's solvency. If, as in this case, there was only one available means of achieving that objective, it followed that the expenses incurred by a director when availing himself of those means were wholly and necessarily incurred in the course of his employment.
Whether the payment by the taxpayer was an allowable deduction as being wholly and necessarily incurred in the course of his employment.
The special commissioner (Colin Bishopp) (dismissing the appeal) said that it was common ground that in order to succeed the taxpayer had to show that the amount he paid fell within Income Tax (Earnings and Pensions) Act 2003 section 336 subsec-or-para 1ITEPA 2003, s. 336(1). Despite the circumstances in which the guarantee was entered into, relief for the payment eventually made by the director was not available under s. 336(1).
It was an inescapable conclusion that the expense, as distinct from the contingent liability, was not incurred in the course of the taxpayer's employment, but only after it had come to an end, with the consequence that it could not be said that the expense was incurred in the course of the employment, and that the taxpayer gained some benefit, albeit in the event very short-lived, from the company's ability to continue to trade. The very fact that by entering into the guarantee the taxpayer discharged his duty as an officer (rather than employee) of the company bestowed some benefit on him (Ansell (HMIT) v BrownTAX[2001] BTC 381; 73 TC 338, Ryall v HoareELR[1923] 2 KB 447; 8 TC 521, Ricketts v ColquhounELR[1926] AC 1; 10 TC 118, Executive Network (Consultants) Ltd v O'Connor (HMIT)SCD(1995) Sp C 56, Hinsley v R & C CommrsSCD(2006) Sp C 569 considered).
1. The facts relevant to this appeal were agreed between the parties and can be stated quite shortly. The taxpayer was a director of a company, and held 5% of its issued shares. In 2002 the company found itself in acute financial difficulty and in September of that year it entered into a debt factoring agreement with a commercial factor. It was a condition of the agreement that the directors enter into personal guarantees in amounts which were proportionate to their respective shareholdings. A term of each director's guarantee was that it should remain binding on him for a period of four months after he resigned from his office. For reason unconnected with the guarantee, the taxpayer resigned his office and left the company's employment at about the end of the same month. Unfortunately the company failed in December 2002 and the taxpayer's guarantee was called upon. There was a lengthy dispute between the taxpayer and the factor but in November 2004 the taxpayer made a payment to it of £10,925, with interest of £447 and legal costs of £1,600.
2. In his tax return for the year to 5 April 2005 the taxpayer claimed a deduction for expenses of the aggregate amount he had paid, £12,972. During that tax year he had been in paid employment, and his earnings had correspondingly been subject to deduction of tax at source. If the claim was valid, he had paid too much tax, to the extent of £5,483.61, and this amount was paid to him very shortly after his return was filed. However, in May 2006 the respondents opened an enquiry in accordance with Taxes Management Act 1970 section 9As. 9A of the Taxes Management Act 1970. The enquiry led eventually to the issue of a closure notice on 27 February 2007, by which the claim was disallowed and the taxpayer's return amended accordingly. He now appeals against that decision.
3. He appeared before me in person, while the Commissioners were represented by Colin Smith of their Eastern England Appeals Unit. As the facts had been agreed I heard no oral evidence, though the taxpayer supplied some additional background information at my request.
4. The parties are agreed that in order to succeed the taxpayer must show that the amount he...
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