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image of businessman and private jet | accountingweb | Extraction of value via director's loan account invalidated business investment relief
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Non-dom’s business investment relief withdrawn

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A non-domiciled taxpayer invalidated his business investment relief because his use of a director’s loan account to pay personal expenses constituted an extraction of value.

1st Jul 2024
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The rules applied to non-domiciled UK resident taxpayers (“non-doms”) have become something of a political football since Jeremy Hunt unexpectedly announced plans to reform the regime in Spring Budget 2024, snatching a key revenue-raising policy away from Labour and leaving shadow Chancellor Rachel Reeves with one less trump card up her sleeve. Ultimately, the promised reforms fell foul of the election announcement, which left very little time for the Finance Bill to be rushed through and non-dom reforms were left out in the cold.

A little-used relief available to non-doms looking for a way to avoid paying tax on foreign income brought into the UK is business investment relief (BIR). Broadly, non-UK-source income can be remitted to the UK without a charge to UK tax if it is invested in a qualifying limited company.

BIR is subject to various conditions (sections 809VA to 809VO ITA 2007) including that the relief can be withdrawn if the investor extracts value directly or indirectly attributable to the investment. This does not include amounts extracted that are subject to income tax or corporation tax; dividends; market rate loan interest; director’s remuneration; or any other amount paid or provided to the person in the ordinary course of business and on arm’s length terms.

Extraction of value

Banker, financier and entrepreneur, Benoît d’Angelin was UK resident but not UK domiciled (a non-dom) in 2016. He invested £1.5m into a UK company, incorporated in December 2016, of which he was the sole shareholder and director. D’Angelin had the funds available in the UK to make the investment but, with legal advice, chose to invest foreign income with the expectation that it would qualify for BIR and so avoid being taxed on the remittance basis.

There was no dispute that the investment initially met the conditions for the relief. However, it was subsequently denied by HMRC on the basis that d’Angelin’s use of a director’s loan account (DLA) to pay personal expenses constituted an extraction of value within the meaning of s809VH ITA 2007, invalidating the relief claim. This landed d’Angelin with additional tax payable of £675,307.35.

Other extractions of funds that did not trigger withdrawal of the relief were an interim dividend of £1.65m; an annual salary of £200k; and a director’s bonus of an unknown amount.

Every penny counts

In his oral evidence at the first tier tribunal (FTT) d’Angelin explained that the loan account was set up based on an arrangement he had used with a previous employer. Sometimes he paid company expenses personally, sometimes he used the company credit or debit card for personal expenditure. Some of the amounts involved were minuscule, with the lowest being £0.79 for a monthly subscription to iTunes, ranging up to £20,380 on private use of a jet and £12,576 on a family holiday to Dubai. By 28 March 2018 he had racked up a balance on his DLA of £71,515.

D’Angelin had “more than enough” personal funds available to have paid for all of the items directly and to have paid off the DLA at any time. The DLA, he said, was used as a vehicle to avoid having to arrange ad hoc reimbursement for every transaction.

The DLA was interest-free and repayable on demand. Although sporadic and irregular repayments were made during the two years after the company started trading, the FTT did not find any evidence that the loan was paid off in full at any time. 

Value does not equal net value

D’Angelin’s core argument was that “extraction of value” in the legislation should mean “net extraction of value” as otherwise, read literally, “absurd consequences ensue”. He claimed that there had been no extraction of net value because the provision of interest-free credit by an employer to an employee is treated as carrying interest on the loan equal to the cash equivalent. He also argued that the DLA was provided to him in the ordinary course of business on arm’s length terms, so fell within the exception.

HMRC disagreed, arguing that the word “value” is not concerned with whether the recipient is better off overall, and the word “net” could not be added into the interpretation of the legislation. The purpose of the extraction rule was to ring-fence foreign income and ensure that extraction would only be possible in limited and tightly controlled circumstances. It added: “Parliament cannot have intended to permit taxpayers to remit foreign income tax-free by investing it in a target company but then extracting it from the company by borrowing it for the taxpayer’s private use in the UK.”

Appeal dismissed

The FTT agreed with HMRC that the words of the legislation should be given their natural and ordinary meaning, stating: “It does not seem to us that there is any obvious reason why, as a matter of natural and ordinary language, extraction of value must mean net extraction of value.”

Dismissing d’Angelin’s appeal, Judge Christopher McNall concluded: “The circumstances of this appeal – Mr d’Angelin making an investment, claiming BIR on that investment, but using money from the company (repeatedly, and over a significant period of time) for personal expenditure – are, in our view, the very mischief at which the extraction of value rule is aimed. The consequence is that the relief is lost.”

Tax is complicated

This is another example, similar to the Mayfair Avenue Limited case, where the taxpayer unwittingly thwarted their own legitimate attempt to benefit from tax relief through a lack of understanding of the consequences of their subsequent actions. Both cases should be taken as a warning that where taxpayers want to take advantage of reliefs available, it is vital to seek advice from a tax professional to avoid a hefty bill further down the line.

Replies (2)

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By Justin Bryant
01st Jul 2024 15:35

A similar “making good” kind of argument was made re an interest free loan by a director to a company in Stones v Hall (Inspector of Taxes) [1989] STC 138 re an accommodation BIK (and only failed there due to a lack of documentation linking the two).

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By FactChecker
02nd Jul 2024 00:19

Another "sole shareholder and director" ... who often tend to assume after a while that the system will always bow to their needs and so don't pay full attention to all the expensive advice for which they pay.

The only friend I have who lives that lifestyle (although with rather larger sums at stake) has the brains & training to understand it all but pays for top-notch advice in all 5 continents in which he operates and lives ... and runs his schedules rigorously within that advice. Absolutely no ad-hoc decisions (or at least not to commitment level) and, for instance, always a back-up plan in case say a flight is cancelled.

The mistake here wasn't in itself what d’Angelin did ... it was when he decided to start extracting money in ways that he'd not checked with any advisers. Presumably he's learned his expensive lesson.

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