TC09518 - [2025] UKFTT 00528 (TC)

The parties were agreed that the principal authority which we must apply when determining this appeal is that of Collins v Addies (Inspector of Taxes) [1992] STC 746 (and as it approves the analysis of the High Court [1991] STC 445) (Collins).

A full understanding of the facts of the case are relevant to the matter we have to determine. Mr Collins and Mr Greenfield were participators in a close company, and both were indebted to the company; the total debt was £79,000. Mr Brent was also a shareholder. The shares held by Mr Collins and Mr Greenside were transferred to Mr Brent and the three men and the company entered into an agreement regarding the outstanding indebtedness. The terms of that agreement provided:

“2.

In consideration of the covenant by [Mr Brent] hereinafter contained the Company hereby releases and discharges [Mr Collins and Mr Greenside] from all liability to repay to the Company the Current Accounts (insofar as the same does not exceed £ 68,000) and from all actions claims proceedings and demands in respect thereof (up to the said sum of £68,000).

3.

In consideration of such release and discharge [Mr Brent] hereby covenants with the Company that he will henceforth assume liability for and pay and discharge the Current Accounts due and owing to the Company by [the taxpayers] (insofar as the same does not exceed £68,000) and the Company hereby accepts [Mr Brent] as debtor up to the said sum of £68,000 in place of [Mr Collins and Mr Greenside].”

As to the balance, Mr Collins and Mr Greenside paid Mr Brent £11,000 and Mr Brent in turn settled that portion of the outstanding sum.

The issue to be determined initially by the Special Commissioner was whether the provisions of the agreement gave rise to a charge under section 287 Income and Corporation Taxes Act 1970 which is relevantly now section 415 ITTOIA. The Special Commissioner determined that the release provided under the agreement fell squarely within the terms of section 287 and there was appropriately a charge to income tax on both Mr Collins and Mr Greenside as to their proportionate share of the £68,000 indebtedness from which they were released.

Millett J, (as he then was) refused the taxpayers appeal from the Special Commissioner in the following terms:

“Under the terms of the deed the company released the taxpayers from liability on their respective current accounts … in consideration of the substitution of Mr Brent for the taxpayers as a debtor to the company in that amount (Footnote: ¹).

…

… A novation discharges the legal obligation of the original obligee and replaces it by a new obligation of a new obligee. It does not merely substitute a new debtor for the old in respect of the same debt or liability because as a matter of law it is not possible for a debtor to assign a legal liability. … As a matter of law, that undoubtedly constitutes a release from the old debt and its repayment by an entirely new debt owed by Mr Brent.

But that is not the end of the case because the next argument of counsel for the taxpayers is that the word ‘releases’ must mean the discharge of a debt otherwise than by payment or satisfaction. If the creditor accepts payment from a third party in satisfaction of the debtor’s liability that would clearly constitute the repayment of the debt, and not the release of the debt. The debt is discharged by payment and not release. Again, if a creditor accepts something of equal value, whether from the debtor or a third party, that would equally constitute a discharge of the debt; it would be discharged by satisfaction rather than payment, but not by release. Again, that would not give rise to a tax charge. Payment in kind from the debtor himself or payment by a third party on behalf of the debtor would bring the liability to an end by repayment or satisfaction and not release. The Crown rightly accept both contentions. (Footnote: ²)

…

… In my judgement, [ss455/458 CTA (Footnote: ³) and s415 ITTOIA] draw a clear distinction between the release or writing off of the debt on the one hand and its repayment or satisfaction on the other. While payment by a third party on behalf of the debtor, or payment in kind by the debtor himself or by a third party, accepted in full discharge of the debt may well constitutes repayment or satisfaction and not a release for the purpose of these sections, I do not consider that the substitution of a fresh promise to pay by a third party can be similarly treated. A promise to pay by a new debtor constitutes valuable consideration and may properly be accepted by the company in substitution of the debt of the original obligee, but as a matter of ordinary usage would not be regarded as payment. In my judgement there is a clear distinction to be drawn between a novation which involves the release of one debt and the substitution of another, and all other forms of payment or satisfaction under which the debt is treated as repaid with no outstanding obligation on any party in respect of the debt or similar sum.” (Footnote: ⁴)

On appeal to the Court of Appeal the Court noted that the code for charge to corporation tax and associated relief (i.e. those provisions now in sections 455 and 458 CTA) and the charge to income tax under (what is now section 415 ITTOIA) are separate but associated codes for taxation. In this context the Inland Revenue contended that the income tax charge arising under what is now section 415 ITTOIA applied to any release that arose neither from repayment nor satisfaction (by way of valuable consideration in kind) of the debt (Footnote: ⁵).

Nourse LJ accepting Millett’s analysis and the Inland Revenue’s interpretation of the application of the income tax charge determined:

“The Crown’s basic proposition, with which I agree, is that ‘release’ does not include any transaction which either consists of or amounts to a repayment of the loan, even if the transaction, when viewed in isolation, might be said to have the effect of releasing the debtor from his obligation to repay the loan. The reason for that limitation is that the repayment of the loan, or the acceptance by the company of something equivalent to it, effectively enables it to recover its money, in which event there is no justification for imposing a liability to tax on the participator. The limitation has nothing to do with gratuitousness. Moreover, it is not one which excludes a novation, being a transaction which does not enable the company to recover its money.”