Loans to participators: No release of debt took place

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The appellants (in four separate appeals) were involved in similar directors’ loan waiver schemes, whereby a board minute explained the company’s wish to release sums owing by the director by way of a bonus for the director’s services to the company. A deed was accordingly executed setting out the sums released. The company paid National Insurance contributions but not employment income tax on the released amounts and deducted the sums released from its taxable profits. HMRC challenged the schemes. Income tax determinations were made under the Income Tax (PAYE) Regulations 2003, SI 2003/2682, reg 80 and corporation tax closure notices were issued by HMRC for the tax years 2006/07 to 2009/10. The appellants appealed. They argued that the amounts released were taxable income of the directors under ITTOIA 2005, s 415 at the dividend ordinary rate. HMRC contended that the amounts were taxable as employment income under ITEPA 2003, Pt 2, on the basis that the waivers of the loans were, in reality, reward for the directors’ services.

The First-tier Tribunal (FTT) first considered whether ITTOIA 2005, s 415 applied. Reading the board minutes as a whole, together with the deed of release, the FTT noted they reflected that there was an exchange of equal value; the company wanted to award the directors sums so they could pay off their loans, but instead of handing over the money only for it to be handed back to make the repayment, the company reduced the directors’ indebtedness. These facts pointed towards the transaction amounting to repayment or satisfaction of the loan even if, because of the lack of a contractual entitlement, there was not a set-off of mutually enforceable legal obligations. The FTT concluded on the facts that the transaction which took place between the company and the director amounted to a repayment of the relevant loan and that the appellant companies did not release the loans for the purposes of the ITTOIA 2005, s 415 charge. No determination was made on whether any PAYE obligation arose in relation to the amount of earnings.

Esprit Logistics Management Ltd & Ors v Revenue & Customs [2018] UKFTT 287 (TC)

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