Heather Self reviews the basic conditions which need to be satisfied in order for a transaction to be treated as a loan relationship within CTA 2009 Part 5.
C J Wildbird Foods Ltd (Wildbird) is a supplier of specialist bird food and it found itself in disagreement with HMRC over the treatment of loans it had made to another company. The case was heard at the FTT as C J Wildbird Foods Ltd v HMRC UKFTT0341 (TC06556).
Wildbird took a 50% stake in internet forum Birdforum Ltd (Birdforum) and agreed to advance funds for working capital purposes. The terms of the investors’ loan were set out in the shareholders’ agreement: the loan was repayable on demand (but repayment would only be requested following discussion with the board of Birdforum) and carried interest at a rate of 2% over base rate, although in practice no interest was ever charged or paid.
Birdforum was successful in attracting members, with 155,000 currently registered, but less successful in turning activity into profit. By 31 March 2015, the accumulated debt due to Wildbird was £1.5m and in each of the three previous years, Wildbird had advanced around £150,000 per annum.
Wildbird claimed a non-trading loan relationship debit for the amounts advanced in each of the years to 31 March 2013, 2014 and 2015. HMRC opened an enquiry and denied the deduction, on the grounds that there was no loan relationship between Wildbird and Birdforum.
HMRC had previously raised other arguments, including one of unallowable purpose (CTA 2009 s 441) but those arguments had all been dropped by the time the case reached the tribunal. The judge noted that: “The relationship between Birdforum and Wildbird, while friendly, is nonetheless arms’ length. I am satisfied that the appellant is providing the support to Birdforum for its own commercial reasons.”
The definition of a loan relationship is in CTA 2009 s 302:
- For the purposes of the Corporation Tax Acts a company has a loan relationship if:
- The company stands in the position of a creditor or debtor as respects any money debt (whether by reference to a security or otherwise), and
- The debt arises from a transaction for the lending of money
A “money debt”, at its simplest, is a debt which falls to be settled by the payment of money (s 303). Certain other debts may also fall to be regarded as money debts.
HMRC sought to argue that there was neither a “money debt” nor a sum which arose “from a transaction for the lending of money” because it was “not a loan, contingent or otherwise, as it does not carry the hallmarks of a loan, which are that it is repayable, it carries interest, is an ordinary business transaction etc”.
In support of their arguments, HMRC cited Smart v Lincolnshire Sugar Ltd ((1937) 20 TC 643), which they said was authority for the proposition that before a contingently repayable amount could be regarded as a debt, it had to have “the hallmarks of a loan”.
HMRC’s submissions relied on a case which was 60 years old and entirely ignored the fundamental point that the loan relationships legislation is intended to be a comprehensive code.
In the case of Greene King PLC and Greene King Acquisitions Ltd v HMRC ( EWCA Civ 782), the Court of Appeal overturned the view of Mann J in the Upper Tribunal, where he said that the relationship between the two companies “is one which involves a debt, but as a relationship it does not, in any meaningful sense, involve a transaction for the lending of money as between the two of them”.
The Court of Appeal said that “Neither Mann J nor [counsel for HMRC] identified any legislative purpose or policy which would justify such a deviation from the literal meaning of [the legislation]”.
In MJP Media Services Ltd v HMRC ( UKUT 100 (TCC)), the taxpayer, MJP, failed to overturn the decision of the FTT that its intercompany debt did not qualify as a loan relationship. In that case, it was agreed that there was a money debt, but MJP failed to discharge the burden of proof to show that there had been a transaction “for the lending of money”.
In Wildbird, the judge said that it was quite clear that the amount payable by Birdforum was a money debt. Furthermore, the legal nature of the transactions meant that there was no doubt that each advance amounted to “a transaction for the lending of money” unless it had to be recharacterised following the decision in Smart.
The judge considered that there were too many differences between the cases for Smart to be relevant. He also noted that the hallmarks which HMRC argued for were not required by the legislation. The tribunal, therefore, found that the debt owed by Birdforum to Wildbird was a loan relationship.
The clear documentation of the terms of the loan, together with evidence of the company’s commercial purposes, meant that the taxpayer’s arguments succeeded.
About Heather Self
Heather has over 30 years’ experience, most recently as a partner at Pinsent Masons and prior to that as the head of tax at a FTSE 100 company, an anti-avoidance adviser at HMRC and a partner at a Big 4 accounting firm.
She is a member of International Tax Review’s Global Tax 50 2017, recognised for her work in setting up the ‘Women in Tax’ network and regularly speaks and writes on tax matters.
Heather is a Fellow of the Institute of Chartered Accountants in England and Wales and of the Chartered Institute of Taxation; she has a long-standing interest in tax policy and has previously been a member of the CBI Tax Committee for a number of years, and is a former chair of the Chartered Institute of Taxation’s technical committee.
Heather is an experienced speaker and media commentator and frequently comments on topical tax issues on BBC radio and TV as well as at professional and academic conferences.