When is a loan to a participator waived?

The issue

Section 455 CTA 2010 is a relatively well-known piece of tax legislation. It aims to apply a ‘temporary’ tax charge of 33.75% to a company which makes a loan to a participator (broadly a shareholder) which is still outstanding nine months after the year end. Its aim is to stop shareholders avoiding paying tax on dividends by simply borrowing funds from the company. I described it as ‘temporary’ because the company effectively gets a refund of the charge when the loan is either repaid or written off. Any write-off would itself be treated as a dividend – as if a dividend had been declared and then the proceeds used to repay the loan. Usually, the timing of such write-offs will be very clear, but the recent case of England v HMRC showed how things can go wrong.

England v HMRC [2023]

The key points of this case were as follows:

1. The Englands owed £1m to their company on 28 October 2013 when it was in creditors’ voluntary liquidation.
2. There was a deal with the liquidators whereby the Englands would repay £100,000 of the loan and have the remaining £900,000 formally released.
3. The £100,000 needed to be repaid over a two-year period based on a detailed repayment schedule. If any of the repayment dates or amounts were missed then the whole £1m would be payable (secured by a legal charge).
4. The agreement said that it was “in full and final settlement of the liability and subject to the payment of the settlement sum in full and final settlement of all known causes of action that the liquidator may have against the debtors”.
5. HMRC sought to tax the £900,000 write-off in the 2013/2014 tax year, but the Englands argued that there was no write-off until they had repaid the £100,000 in accordance with the schedule (because otherwise there was no write-off) and appealed the case to the First Tier Tribunal.

The Englands lost the appeal and the Tribunal ruled based on various case law that the write-off had taken place in 2013/2014. A key reason for this conclusion was that from the date of the agreement the Englands only had to pay £100,000 in full and final settlement (notwithstanding the fact that the loan could become ‘live’ again if the repayment schedule was breached).

Forbes Dawson view

When I read this, I was surprised by the Tribunal’s decision. This is because the Tribunal agreed that the loan should be treated as being written off at a time when the Englands could ultimately end up having to repay the full loan (if for example they missed a scheduled payment). If this scenario were to occur, it is not obvious that there would be any way to claw-back any tax paid on the write-off – which seems contrary to common sense. This point of view was also backed up by a recent article by Keith Gordon (from Temple Tax Chambers) in this month’s issue of Tax Adviser. Keith says in his article that he is hopeful that the case will be taken to the Upper Tribunal and rightly points out that this case highlights the importance of how legal documents are worded for tax purposes. I would tentatively suggest that the matter could have been put beyond doubt if the agreement had clearly stated that £900,000 would be waived after such time that the £100,000 had been fully paid in accordance with the schedule. It’s all about semantics but that’s tax!




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