TC09518 - [2025] UKFTT 00528 (TC)

As confirmed definitively in Hazelwood Properties Ltd v Rossendale Borough Council [2021] UKSC 16 (Hazelwood) when deciding this case we must interpret section 415 ITTOIA by reference to its purpose (discerned from the statutory context and objectives of parliament) and apply it to the facts determined realistically and looked at in the round (see analysis of historic case law and conclusions drawn in paragraphs 9 – 14 of Hazelwood).

Our task in that process is made considerably easier because, as accepted by the Tribunal in Esprit (paragraph 111), Collins very clearly expresses the purpose of section 415 ITTOIA as taxing distributions made by close companies through the releasing (in the ordinary sense of the word) of obligations to repay sums advanced to or otherwise due from participators.

From Collins it is also clear that, where a debtor is released from a debt as the natural and ordinary consequence of having repaid or satisfied the debt, section 415 ITTOIA will not apply. Given the purpose of the tax charge, and by reference to the articulated position adopted in Collins, repayment or satisfaction requires that the close company has received full value of the debt in cash or kind from the debtor or a third party by way of satisfaction of the loan such that the close company “recovers its money”. The substitution of one repayment obligation for another has clearly been rejected as representing repayment or satisfaction. However, the setting off of equal value and mutual financial obligations between the close company and the participator was accepted as payment and not a relevant release in Esprit (see paragraph 113 and 117).

We therefore turn to consider the terms of the Novation Deed:

Mr Redpath sought to contend that the Novation Deed should be construed as establishing that the Appellant’s indebtedness to Thermoline had been satisfied. He said this was achieved as follows:

We have not found the Novation Deed has been easy to construe. However, having carefully considered its terms, we are prepared to accept the contractual effect of the Novation Deed is as set out in paragraph 39 above i.e. under contract valuable consideration was provided both for the acquisition of the rights and obligations under the Loan and relating to the Debt by PHSW from Thermoline and for the release of the Appellant from its indebtedness to Thermoline such that PHSW was substituted as lender to the Appellant. During the hearing we had explored with the Appellant whether its contractual analysis essentially required the £512,713.89 to do double service as consideration. In the end from a contractual perspective we are satisfied that PHSW’s obligation to pay (as reflected by the inter-company loan account) represented valuable consideration for the creditor to creditor novation and PHSW’s acceptance of all rights and obligations under the Loan as valuable consideration acceptable to Thermoline for the release of the Appellant.

However, in light of Collins accepting that contractual analysis does not determine the taxing outcome, Millett J and thereby Nourse LJ accepted that the novation in that case was valid with each party accepting the value of the various releases and assumptions of rights and obligations connected with the debt. We must therefore determine how section 415 ITTOA applies here despite the conclusion that there is valuable consideration for a creditor to creditor novation and consequent release of the Appellant from his loan relationship with Thermoline.

Having carefully considered Collins we determine that the release provided for under clause 3.1(a) is a taxable release. We readily acknowledge that the factual matrix in the present appeal differs from that in Collins. In Collins Mr Brent simply stepped into the shoes of Mr Collins and Mr Greenside in respect of £68,000 of their joint indebtedness. In the present case PHSW acquired a liability and, in consequence of the liability being outstanding on an inter-company loan account, PHSW became independently indebted to Thermoline. However, such indebtedness was, in our view, plainly, associated to the indebtedness from which the Appellant was released.

Applying the analysis provided by Nourse LJ, including the analysis adopted from Millett it is, in our view, clear that a release will be taxable even where there is valuable consideration in a contractual sense, unless that consideration results in there being “no outstanding obligation on anyparty in respect of the debt or any similar sum” thereby enabling the party making the release “to recover its money”. Only where there is no debt owed by any party can it be said that there has been no distribution by the close company. The close company has not been made whole, as in Collins it has the means by which it may recover the money but has not recovered it. In this regard we see no relevant distinction between substitution of a debtor (as was the case in Collins) and the substitution of the creditor where that substituted creditor does not enable the original creditor to recover its money. In the latter case there remains an outstanding obligation to the original creditor of a similar sum i.e. the value of the novated debt. We do not consider that for the purposes of the “limitation” applied to section 415 ITTOIA a debt can be “satisfied” where the sum remains outstanding. Cash or physical assets may satisfy the indebtedness but not a right to call on another in connection with the debt.

We accept that the contractual analysis demonstrates that the parties provided valuable consideration as between PHSW and Thermoline for the novation, substituting PHSW as creditor in the loan relationship with the Appellant. However, in financial terms Thermoline had not recovered its money and there remained an outstanding obligation from PHSW of the precise amount from which the Appellant had been released by Thermoline. In that sense there was substitution of one debtor for another. Further, we do not consider that the PHSW’s liability to Thermoline could be said to satisfy the debt owed by the Appellant. It arose in consequence of an associated transaction (the transfer of a bundle of rights and obligations to PHSW). The fact that having sold its interest in the Loan to PHSW, Thermoline had no right to pursue the Appellant does not mean that the debt was satisfied. As in Collins it had been substituted for equivalent value by way of an alternative debtor. Thus, on both 31 December 2020 and 16 March 2021 the amount of £512,713.89 remained outstanding to Thermoline with the consequence that Thermoline did not recover its money,thereby squarely meeting the conclusion in Collins.

We note that in reaching our conclusion we have placed no reliance on the language used by Hazelwoods LLP in their letter of 10 February 2022 making the claim for relief in respect of the s455 CTA charge. However, had we needed to have done so, whilst we accept that Hazelwoods LLP may have been incorrect in their view, we consider the precise language used by them, limiting the basis for relief to a release when section 458 CTA applies to either release or repayment, is at least indicative that the parties considered or were at least advised that the Novation Deed gave rise to a release and not a repayment.

For the reasons stated we find that the Appellant was released from his indebtedness to Thermoline, a close company of which he was a participator, in circumstances in which section 455 CTA had applied in respect of the advance made to him, with the consequence that HMRC were correct to conclude that section 415 ITTOIA applied.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.