TC03150: Leeds Design Innovation Centre Ltd and related appeals
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 December 2013 |
| Neutral Citation | [2014] UKFTT 9 (TC) |
| Date | 20 December 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 009 (TC)
Judge Rachel Short, Nigel Collard.
Mr Andrew Thornhill QC and Edward Waldegrave appeared for the Appellant
Mr James Rivett instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax and NIC - Cheap loans - Employee benefit trust - Discount agreement - Was interest or discount paid - Was re-financing payment - Was interest paid for relevant years of assessment - Held - Payments under discount agreement interest for tax purposes - Refinancing did not amount to payment - No interest paid for relevant years - Appeals dismissed.
The First-tier Tribunal dismissed the taxpayers' appeals finding that loans made under an employee benefit trust were to be taxed as "cheap loans" or "beneficial loans" as no interest was paid on the loan agreements for the years in question.
Mr Noble and Mr Connolly are directors of Leeds Design Innovation Centre limited and Mr Watkiss is an employee of the company. The company set up an employee benefit trust (EBT) with the trustee of the EBT being a Guernsey resident entity. The EBT lent funds to a British Virgin Islands entity, AE limited (AE), which made loans to Mr Noble and Mr Connolly (the directors) and Mr Watkiss.
The loans were made on the basis of discount agreements. Each individual had to repay their loan on the tenth anniversary of entering into the agreement. The repayment terms included an obligation on the borrower to make a payment of a sum described as a "discount". The loans were due to be re-paid during 2008 and 2009, but Mr Watkiss did not repay his loan until April 2012 and the directors re-financed their loans under finance agreements with AE in 2010.
The appellants' argued that the obligations under the discount agreements were in fact payments of interest; they were calculated by reference to LIBOR and the overriding presumption should be that this payment was legally and commercially interest and not discount. Mr Watkiss had paid his "discount" in April 2012 when he repaid his loan and the re-financing agreements entered into by the directors should be treated as "in satisfaction" of the original debts, including the outstanding discount element. They argued that it was "absurd" to suggest that late, or early, payment of interest meant that a charge could arise under section 160s. 160, ICTA 1988 or section 175s. 175, ITEPA 2003 when the payment in full had actually been made.
HMRC contended that payments were in fact discount because on the drafting of the discount agreements the repayment amount included the full amount of the discount due, even if the loan was re-paid early. The discount was not accruing on a daily basis as interest would have. However, even if the payments could be treated as interest, they could not be treated as paid "for" the relevant years in question. Income tax assessments were made on an annual basis by reference to what has happened in a particular year. A taxpayer then had the opportunity to reopen years within a four year period if interest was in fact paid "for" a particular year at a later time.
The First-tier Tribunal agreed with the appellants, on the basis of Lomax (HMIT) v Peter Dixon & Son, LtdTAX(1943) 25 TC 353, that a payment which contains no element other than a LIBOR based return, differentiated from interest only because it is paid at the end of the loan, cannot be said to be anything other than interest. Therefore, the "discount" payable under the agreements should be treated for tax purposes as interest and not discount. However, the Tribunal concluded that while there was no argument that Mr Watkiss' payment was made when he paid off the loan, the re-financing by the directors should not, in this case, be treated as amounting to payment of interest. The directors did not suffer any actual cost as a result of the re-financing, which from their perspective was very similar to a "book entry" as their debts were rolled over into the new re-financing agreement.
The Tribunal went on to consider whether Mr Watkiss' payment in 2012 could be taken into account for section 160s. 160 ICTA 1988 and section 175s. 175 ITEPA 2003 and concluded that there was no basis beyond making a claim that the late payments were actually "for" earlier periods, and this should have been done within a four year period, by 2010 at the latest.
The Tribunal therefore dismissed the income tax appeals and as the point of issue was the same for the company's appeal against Class 1A national insurance contributions, this appeal was also dismissed.
HMRC are increasingly looking at arrangements made under EBTs. In this case concerning employment-related loans, the payment of a "discount" at the end of the term of the loan could be treated as a payment of interest and would have taken the arrangements outside a charge to tax if the loans had been repaid and an election had been made in time to treat the payments for earlier years.
[1]This appeal concerns the income tax treatment of certain arrangements made under an employee benefit trust for the benefit of Mr Noble, Mr Connolly and Mr Watkiss, all of whom were either directors or employees of Leeds Design Innovation Centre Limited (the Company), and the Company's Class 1A national insurance obligations in respect of those arrangements. In each case the years of assessment are the years from 1999-2000 to 2004-5, excluding in each case the 2003-4 year of assessment. An appeal against HMRC's decision to charge income tax on each of the employees was made on 24 November 2009. An appeal against HMRC's decision to charge Class IA national insurance to the Company was made on 25 November 2009.
[2]The point at issue between the parties is whether the loans made available to each of the employees under agreements described as the Discount Loan Agreements (the "Discount Agreements") entered into by each of them in March and July 1998 fell to be taxed as a "cheap loan" or "beneficial loan" by reason of no interest being paid on that loan agreement for the years in question, or whether the fact that a sum described as a payment of discount was due at the end of the term of the loan, took the arrangements outside a charge to tax for either the employees or the Company.
[3]It was agreed before the Tribunal that the point at issue was the same as respects each of the employees' income tax position and the Company's Class 1A national insurance obligations and that the provisions of the Discount Agreements were the same for each of the employees.
[4]The Company is a UK resident company in which all the shares are owned by Mr Noble and Mr Connolly who are its two directors. Mr Watkiss is an employee of the Company. The Leeds Design Innovation Centre Pre-Retirement Employee Benefit Trust ("EBT") was established on 9 March 1998 by the Company. The Trustee of the EBT is a Guernsey resident entity, Louvre Trustees Limited. The EBT lent funds to a British Virgin Islands entity, A E Limited ("AE"), which made loans to Mr Watkiss, Mr Noble and Mr Connolly. The loans were made on the basis of the Discount Agreements and the loans made under those agreements which are the subject of this appeal are set out below. The Discount Agreements allowed for more than one loan to be advanced and several loans were in fact made under one Discount Agreement. There was no dispute between the parties that the rates of "discount" which were charged under the agreements were commercial rates.
Name |
Date of Discount Agreement |
Date of Appendix |
Amount of Loan £ |
Mr Noble |
12 March 1998 |
n/a |
51,000 |
18 March 1999 |
n/a |
90,000 |
|
18 March 1999 |
12 October 2000 |
55,000 |
|
18 March 1999 |
27 March 2002 |
20,000 |
|
18 March 1999 |
26 March 2003 |
93,600 |
|
18 March 1999 |
18 December 2003 |
25,000 |
|
Mr Connolly |
12 March 1998 |
n/a |
66,000 |
1 March 1999 |
n/a |
90,000 |
|
1 March 1999 |
16 October 2000 |
64,600 |
|
1 March 1999 |
27 March 2002 |
20,000 |
|
1 March 1999 |
26 March 2003 |
86,400 |
|
1 March 1999 |
18 December 2003 |
25,000 |
|
Mr Watkiss |
31 July 1998 |
n/a |
7,000 |
[5]The Discount Agreements obliged each of the individuals to repay their loan on the tenth anniversary of the entering into of the Discount Agreement. The repayment terms included an obligation on the borrower to make a payment of a sum described as "discount". This element was calculated by reference to LIBOR plus 2% on a compounding basis, on the amount of the loan for every complete year of the loan. The Tribunal were provided with copies of the Discount Agreements entered into with Mr Noble, Mr Connolly and Mr Watkiss.
[6]The loans all became due to be re-paid during 2008 and 2009, but were not, in fact, repaid then. Mr Watkiss paid off his loan on 25 April 2012. Mr Noble and Mr Connolly did not pay off their loans, but refinanced them under finance agreements with AE on 27 October 2010 ("the Refinancing Agreements"). The Tribunal was provided with copies of these Refinancing Agreements, which were also described as "discount agreements". We were also shown the schedules calculating the outstanding amounts due, which referred to an interest rate and the number of days for which the...
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