Close company loan to non-participant

It might be helpful to the OP if you were to cite the authority behind that, Justin.

The nearest we have is Lyon & Turnbull (Edinburgh auctioneers) which my father, who dealt with them a lot re executries etc, used to refer to as Lion & Swivel Cow

We're not bloodhounds, but I do agree that a fuller explanation of the facts may be required. For instance, and perhaps tied to your first question, what did the ursine friend do with the cash?

I once had a client called Deepa Mystry, but then she got married :(

No word of a lie, I used to know a Chinese chippy where the partners were Hung Lau and Lai Yu. (Say them aloud).

In that case, if push came to shove and it ended up in FTT it would almost certainly be treated as a distribution per my above comment (otherwise it would be the easiest profit extraction scheme in the world - your company lends to girlfriend etc. and then writes it off later when it's all been spent on handbags etc.).

You still haven’t provided any authority for that proposition.

At random, see para 32 here for how things can potentially be characterized as distributions if they are not genuine (loans etc.): https://www.bailii.org/ew/cases/EWCA/Civ/2021/795.html

That case deals with the characterisation of payments to employees/shareholders of the company. Absent any information about the exact relationship between the parties in the OP's case, there is nothing in that decision that would apply to a payment to someone with no connection to the company or its participators.

The words pearls and swine come to mind. See here from para 69 "...whether the payments were a distribution (which did not depend on the contractual position)..."

https://www.accountingweb.co.uk/any-answers/company-loan-to-a-friend-of-...

https://www.accountingweb.co.uk/any-answers/aikido-scheme-fails-at-ftt

If you're going to insist on ignoring the obvious (para 69 is no more relevant than 32, since - to reiterate - that case is about the nature of payments to individuals that are connected, by employment or shareholding, with the company - unless of course you are trying to argue that the payment to the 'friend' results in that person being deemed to be an employee or shareholder), I'm done.

(I'm well aware of the discussion on that other thread, the (non-)outcome of which has little or no bearing on the OP's case here. Or are you suggesting that thread is your 'authority' for the advice to the OP above?)

And of course cross-referencing the Aikido decision is just another example of you citing case law that does not support your arguments. (Hint: "of which they were the sole shareholders and directors")

"Most clients and advisers seem to be happy that if a loan to a shareholder is released, that would constitute a distribution but, for some reason, many do not recognise that the same is usually true for loans to a related company with common shareholders, and many will push back when the matter is raised."

https://www.taxjournal.com/articles/debt-releases-between-companies-with...

This confirms the principle that the write-off needn't be with a shareholder for it to be a distribution, and so you can substitute "related company" for "girlfriend of shareholder" and in any event the case I cited said a court can find a disguised distribution (regardless of what any loan contract says) and making a soft loan from your company to your girlfriend (rather than yourself) that you write off (without properly trying to recover it) is just that, otherwise it's the easiest profit extraction scheme in the world n'est-ce pas?

Archie-Bald wrote:

Mr Lion's actions to get the money back for the business will have been a quick chat with Mrs Bear to see how her finances are. Mr Lion's company has a decent level of reserves and ongoing income so I doubt £13k means a lot to him so he is probably happy to not be repaid by his good friend.

But it's not 'him' not being repaid by his good friend - it's the company not being repaid by his good friend.

I would say that it is rather important to the analysis and how, if it came to it, a Tribunal might view the arrangements.

For the avoidance of doubt, I have never said that there wouldn’t be a tax charge on a distribution, or deemed distribution. It would all depend on the facts and circumstances - of which we are only now becoming further aware. I had merely suggested that Justin might want to present authority to support his earlier contention that FTT would probably judge there to be a distribution in this case. Which authority he has failed to produce in his usual spectacular and nonsensical fashion.

Lions and tigers and bears, oh my

https://www.youtube.com/watch?v=-HrfbV16-FQ

Archie-Bald wrote:

Probably not important at all but Mr Lion and Mrs Bear are not boyfriend and girlfriend - Mr Lion is married to another Mr Lion (in the office we have nicknamed him Mr Tiger). Mr Lion and Mrs Bear are just friends.

This is very confusing - could you use the visual aid on the top left corner of this page to map this out for us?

Why? The loan wasn’t made to a director, or to anyone connected with a director.

If a Director decides to help someone out this is a personal decision, what has it to do with the company?

I think this is a gift and always was a gift from personal expenditure.

What “you think” is of no relevance, unless by some chance you also know the individuals and their circumstances. Otherwise best to stick to the facts (to the extent that we are aware of the facts). The fact that the loan was made for a non-business purpose can be dealt with under the LR unallowable purpose rules.

Matrix wrote:

Just book the £13k to the DLA.

Might be the cheapest / safest option. Always assuming there's sufficient DLA credit in Mr Lion's company.

Alternative Plan B:

Restore the parties to their original positions (Mrs Bear issues a £13k promissory note to Mr Lion's company);
Mrs Bear's company, which we're told has had a bad year, issues a £13k sales invoice for management services to Mr Lion's company (which. we're told has had a relatively good year); Mr Lion's company endorses the promissory note and uses it to pay Mrs Bear's company; Mr Lion's company benefits from 19% CT relief on the £13k expenditure;
Mrs Bear's company issues a £13k loan to Mrs Bear by endorsing the promissory note in her favour.

Outcomes:
Mr Lion's company avoids any further tax liability for its generosity; indeed it claws back 19% of its £13k expenditure, via CT relief;

Given that Mrs Bear's company has had a bad year, and in the absence of any further information, her company might be able to absorb some or all of its £13k additional taxable profit with little or no CT tax burden. Worst case (probably) is Mr Lion's company saves CT on £13k while Mrs Bear's company bears an equivalent CT tax burden. With a following wind her company's losses might be sufficient to offset the entire £13k of additional sales. Either way, an equitable solution is achieved for both parties;

Mrs Bear's company's DLA is an unknown (to us, that is). Best case is that it's sufficiently in credit to absorb all, or some, of the £13k loan her company is making to her; worst case is that, if her DLA is in debit, the tax burden would shift from Mr Lion and company to Mrs Bear and company. If so, that would arguably present an equitable outcome.

Of course, if Mrs Bear's company is poorly placed on these aforementioned counts - absorbing £13k addn profits & DLA not sufficiently loaded up - then there's always the possibility of involving the third company, the jointly owned company that I'm going to call Giraffe Ltd (because we could use a 'G' for acronym purposes) by issuing a portion of the £13k sales invoice from Giraffe Ltd, if it is the case that that company's trading loss and DLA are in better shape than those of Mrs Bear's company to accommodate this Plan B.

That's all I have. Plan B. Hopefully Mr Tiger will say it's grrreat!

I don't believe that I said that no tax arises (although I can think of plenty hypothetical situations where that would be the case - unfortunately I am not in the habit of following Justin's practice and changing words, inventing facts and circumstances etc just to fit with my argument).

I do not have time to pick apart all of the points above, but would suggest that it is worth reading the recent case of WT Banks. Whilst clearly not on all fours with the OP's case (so I stand as guilty as Justin in citing cases that do not fully support my argument) I consider that some of the comments therein are nevertheless germane to this thread.

Look, it's not complicated. Judges can pierce the corporate veil and so they can easily also recharacterize purported company loan write-offs to friends and the like as distributions (there are EBT cases where they recharacterize salaries as distributions).

Do you really think the fact that the money (or direct benefit) did not physically end up in the shareholder's hands would make any difference? Do you really think a judge would say, "we can recharacterize disguised things for what they really are, but if you disguise a distribution from your company too well for us, by benefiting your non-shareholder girlfriend etc., rather than yourself, then we can't". Do you honestly think that after around 1,000 years of reasonably effective operation that is how English law works? What about nominees, agency, Ramsay, substance over form (e.g. licence vs. lease, spades vs. forks) and so on and so forth?

And that's all assuming the definition of a distribution is not wide enough to catch that without such legal recharacterization and I recall in the Aikido case it was accepted it was wide enough (but I'm too busy today to trawl through it) and the above TJ article supports that.

Furthermore, this is arguably also more or less within the "acquiescence" Rangers principle per the above link, so is arguably salary (or income taxable loan write off) rather than a distribution (if there was never a serious intention to recover the loan -this argument was not helped in Rangers by the fact the loan was with a proper third party and therefore not within the control of the employee, as we have seen recently where such loans have been sold by the trustee and recovery attempts made by the loan assignee).

Also, I recall tax barrister Alun James did a conference last year on such so-called sideways distributions (as analysed in the above TJ article - perhaps you don't have a subscription, which of course would not surprise me in the least).

I'll end there.

Justin Bryant wrote:

I'll end there.

That's probably a good idea, given that the obvious points continue to sail right over your head. (Although at least some progress appears to have been made in that you are now conceding that it might not actually be a distribution in this case.) For the avoidance of doubt, despite TD's suggestion to the contrary, I have not once said that the write-off would not be taxable.

I'll end there.

PS. Yes I do have a subscription to TJ. It doesn't surprise me in the least that you have mis-applied the article to the facts of the OP's case.

Page 3 et seq here shows how wide the distribution definition is (without the need for recharacterization of girlfriend type loans): https://www.citysolicitors.org.uk/storage/2018/06/Guarantees-and-distrib...

Sigh.

You really ought to carry out your research before offering an opinion, rather than scrambling around afterwards trying to find some case law or other documentation to fit your argument. (And I don't know why you keep referring to "girlfriend" - the OP has confirmed the nature of the relationship.)

Taking just a few words from that note - "We consider that a distribution must involve a disposition of the assets of the company to or for the benefit of its shareholders". I have seen nothing so far from the OP which suggests that the shareholder benefitted in this case. (And if you can find the time to read through the Aikido decision, you will note that throughout it talks about payments to shareholders and/or employees - there is no dispute that there is a wide scope to categorise payments as distributions, but I have seen nothing (yet) to convince me that such scope extends beyond payments made for the benefit of an employee or shareholder.)

And with that I really will end there.

Wilson Philips wrote:

Taking just a few words from that note - "We consider that a distribution must involve a disposition of the assets of the company to or for the benefit of its shareholders". I have seen nothing so far from the OP which suggests that the shareholder benefitted in this case.

The shareholder wanted to help his friend and used the company money to do so. The company provided him with the benefit of achieving his goal.

There's nothing about the transaction that suggests it was made for any reason other than the specific non-business wishes of the director/shareholder.

p.s. sorry to reply to a message in which you clearly said you were done!

To clarify, I took Justin ‘to task’ not because he said it but because I disagreed with what he said - a repetition, without any substance, that the payment would likely be taxable as a distribution.

Re Banks, I was referring to the question as to the identity of the borrower - in the OP’s case, was the loan made to, or for the benefit of, the friend or to, or for the benefit of, the shareholder?

Thank you for clarifying. I had missed your point (in part at least).

Since in Banks it was found not to be a loan (and the payment/s was/were found to be made for the benefit of the payer) I can forgive myself for missing your extra point in that regard :-).

I knew I had read a recent case confirming I was right re distributions being treated as distributions (under purposive interpretation - that applies to all legislation and not just tax legislation) in the wide sense per my comments above. See: Khan v HMRC [2021] EWCA Civ 624.
https://www.bailii.org/ew/cases/EWCA/Civ/2021/624.html

In short, there is no requirement for that person to have practical control or benefit from the distribution for him/her to be taxable on it as such.

You need to consider who the distribution really belongs to and look at the matter realistically, ignoring any arrangements put in place to obscure their identity.

See also para 121 et seq here re Aikido scheme: https://www.bailii.org/uk/cases/UKFTT/TC/2021/TC07998.html

See also para 86 here:

https://www.gov.uk/tax-and-chancery-tribunal-decisions/mark-dunsby-v-the...

https://files.pumptax.com/wp-content/uploads/2021/11/24153126/LP_Dunsby_...

You will note this cites para 121 of the case in my above comment (unsurprising as it's the same HMRC junior counsel in both cases).

https://rossmartin.co.uk/sme-tax-news/5921-tax-free-dividend-scheme-fail...

Furthermore, it is clear from cases such as IRC v Reid’s Trustees [1949] AC 361 that whether a dividend is income or capital in the hands of shareholders does not depend on the source from which the dividend is paid by a company. In that case, it was held that a dividend paid out of a capital profit was nevertheless income arising from possessions out of the United Kingdom since the possessions, being the shares in the foreign company, remained intact. What determines the income or capital nature of a distribution by a company is the mechanism employed to make the distribution. So, in Rae v Lazard Investment Co. Ltd [1963] 1 WLR 555, Lord Reid stated:-
“In deciding whether a shareholder receives a distribution as capital or income our law goes by the form in which the distribution is made rather than by the substance of the transaction. Capital in the hands of the company becomes income in the hands of the shareholders if distributed as a dividend, while accumulated income in the hands of the company becomes capital in the hands of the shareholders if distributed in a liquidation.”
Similarly, Lord Guest stated:-
“The character of a payment in the hands of a shareholder in this country is determined for all purposes by the legal machinery employed by the company acting under the relevant statutes.”
Lord Pearce stated:-
“Thus it is not the source from which the assets are distributed but the machinery employed in their distribution which determines the question whether they are received as capital or income. They are received as capital if they are distributed as a bonus issue as in Blott’s case or on an authorised reduction of capital or in a liquidation (see Inland Revenue Commissioners v Burrell. If, however, they are distributed in any other way they are received and taxable as income (Hill (R A) v Permanent Trustee Co. of New South Wales Ltd).”

So the company law machinery determines if it's an income or capital distribution, but not whether it's a distribution in the 1st place it seems.