TC09518 - [2025] UKFTT 00528 (TC)

Mr Redpath’s principal contention is that the facts of the present case fall within what Nourse LJ described as the accepted limitation to the scope of section 415 ITTOIA. It is said that the release expressly provided for in clause 3.1(a) of the Novation Deed was made for valuable consideration, namely payment (made by way of inter-company indebtedness) from PHSW for the rights and obligations previously owned by Thermoline in respect of the indebtedness owed by the Appellant.

It is contended that there is a material and factual difference between the novation in Collins and the Novation Deed. In Collins Mr Brent was substituted as the debtor to the company in place of Mr Collins and Mr Greenside whereas in this case PHSW was substituted as the creditor in the loan relationship with the Appellant. PHSW had, it is said, agreed to pay full value for Thermoline’s rights and obligations as creditor in the loan relationship albeit that the amount that it agreed to pay was recognised in an inter-group loan account rather than paid by way of immediate cash payment.

Consistent with the judgement of the High Court in The Argo Fund Ltd v Essar Steel Ltd [2005] EWHC 600 at [61] and the position adopted by Millett J in Collins the effect of the Novation Deed was to bring to an end the loan relationship between the Appellant and Thermoline and replace it with a new loan relationship between the Appellant and PHSW. In addition, and representing full value consideration for the parties entering into that new relationship, additional rights and obligations were created between PHSW and Thermoline pursuant to which sums were outstanding on the inter-group loan account.

It was claimed that the terms of the Novation Deed expressly required that the rights and obligations under the loan relationship with the Appellant and Thermoline pass to PHSW in consideration of PHSW’s recognition of an amount owing to Thermoline in advance of, and as a condition precedent to, the release granted by Thermoline to the Appellant. Such release representing the natural consequence of the debt owed by the Appellant under the loan relationship having been fully satisfied (or paid) by PHSW by way of the indebtedness accepted under the inter-company loan agreement. In the language used by Nourse LJ the recognition of indebtedness by PHSW was said to amount to repayment or the acceptance of something equivalent to payment by Thermoline.

Thus, whilst it was accepted that: Thermoline was a close company, the Appellant was a participator in that close company, and that the loan relationship between Thermoline and the Appellant fell within the scope of the charge to tax under section 455 CTA the release expressed in clause 3.1(a) was not one which was subject to an income tax charge under section 415 ITTOIA.

This contention was said to be supported by the analysis of the First-tier Tribunal in Esprit Logistics Management Ltd v HMRC [2018] UKFTT 0287 (Espirit). That case concerned tax planning arrangements whereby rather than being paid bonuses, amounts outstanding on director’s loan accounts were written off/released. The taxpayers in that case contended that they should be liable to an income tax charge under section 415 ITTOIA at the dividend rate rather than to tax on income from employment under section 62 Income Tax (Earning and Pensions) Act 2003. The Tribunal concluded that having determined a bonus entitlement the means by which the bonus was paid was to release the indebtedness otherwise owed by the directors such that the release was consequent on satisfaction of the debt.

The Appellant contends that the Tribunal in that case confirmed that section 415 ITTOIA, as interpreted through Collins, imposed a tax charge in situations in which there had been no repayment or satisfaction of the indebtedness. Where the trigger for the release is a repayment or something equivalent to it which satisfies the debt, no charge should arise. The critical question is therefore whether the close company has received payment or valuable consideration in respect of the debt prior to making the release.

When we explored the submissions with Mr Redpath, he emphasised that there was a relevant and material difference between the present case and Collins because it was the right to receive the debt which was transferred. Mr Redpath accepted that the continuation of the Appellant’s obligations to PHSW and the fact that ultimately the Appellant had settled his debt to PHSW who in turn but some years later settled its debt with Thermoline was not strictly relevant but did demonstrate that there was a new and unconnected loan relationship which had arisen. The basis of the latter loan relationship being that PHSW had agreed to purchase and thereby satisfy the Appellant’s debt.

In response to the Tribunal’s concern that the Novation Deed was executed on 16 March 2021 with purported effect from 30 December 2020 Mr Redpath explained that the Novation Date had been set to ensure that the increased indebtedness arising between the Appellant and Thermoline in the accounting period to 31 March 2020 had been released within 9 months ensuring that no section 455 CTA charge arose in respect of that sum. He explained that, having an effective date prior to the date of signature was a common situation in commercial agreements, and he asserted that the timing gap did not preclude a conclusion that the establishment of liability on the inter-company loan account on the acquisition by novation of the Appellant’s debt represented a condition precedent and thereby valuable consideration for the release.

It was denied that the basis on which the Thermoline had claimed relief in respect of the section 455 CTA charge could be determinative of the issue before us. This was on the basis that there was an entitlement to relief whether the Appellant’s indebtedness was released, written off or repaid and the terminology adopted by Hazelwoods LLP may simply have been wrong. It was contended that we need to determine the matter on the facts and by interpreting the Novation Deed.

When we asked Mr Redpath whether we should properly apply section 415 ITTOIA to the substance of the Novation Deed and by reference to the purpose of the provision identified in Collins he confirmed, in essence, that we should. In his submission, Collins supported a conclusion that section 415 ITTOIA did not require a tax charge where the debt had been repaid or satisfied. Thus, if the substance of the Novation Deed was that the Appellant’s debt to Thermoline had been satisfied (as contended) that was the basis on which section 415 ITTOIA should be applied.