Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT/2023/000098 - [2024] UKUT 00404 (TCC)

Fecha: 16-Oct-2024

Correct outcome on re-making the decision

Correct outcome on re-making the decision

51.

Mr Elliott submitted that where the UT re-makes a decision, it is not limited to addressing the specific error of law which has been identified. The UT may make new findings of fact, and reach new conclusions from the facts as found. Here, Mr Elliott submitted that we should “correct” or “smooth over” the findings made by the FTT in relation to KC’s director’s loan account.

52.

Mr Elliott relied in particular on the following findings of fact which had been made by the FTT:

(1)

The Payment did not replace remuneration that had been sacrificed or reduced in anticipation of receiving it and, had the Appellant not made the Payment, then it would not have paid £800,000 to MC as remuneration for his work for the Appellant ([15(12)] to [15(13)]).

(2)

The substantial reason for the Appellant making the Payment to the Trustee was to enable a loan of the £800,000 to be made to MC ([30]). Mr Elliott submitted that HMRC sought and needed the finding that this was a reward for services of MC.

(3)

The loan was a real loan with a genuine obligation to repay ([36(10)]).

53.

The FTT had then addressed the reason for the Loan, setting out its conclusion that “the only reason was because of the work which MC had done over the years…” ([53]). Mr Elliott submitted that this had not been controversial before the FTT – the Appellant had set up an EBT, and any benefit (not using that term as used by the FTT) from an EBT established by an employer is a reward for services. The Loan may be from the employment, but its value was nil because of the obligation to repay.

54.

Further, Mr Elliott addressed the outcome for MC of the arrangements, submitting:

(1)

MC had to use the proceeds of the Loan to buy the Shares from KC;

(2)

after the transactions, MC held the Shares which had been valued at £800,000 and had an obligation to repay £800,000 to the Trustee; and

(3)

it was KC, not MC, who was owed £800,000 by the Appellant. At [50] the FTT referred to this £800,000 as having been put at the “unfettered disposal” of KC and said it saw no reason why, in purchasing the shares from KC, MC had any misgivings that KC would not draw down on her loan account for their mutual benefit. But the FTT then said at 54(11) that “it is precisely because MC has been “under rewarded” that the Trustee considered that MC should be granted a loan which the Trustee knew would be introduced into the company in a form which MC could access without payment of tax”. Yet KC lent the money to the Appellant, and it was KC who could access that money.

55.

Mr Elliott submitted that the decision of the Supreme Court in Rangers SC only addressed one of the three conditions which he had identified, the second, namely whether the transaction was of a type that can give rise to earnings. It had been agreed before the Supreme Court that there was remuneration, and the issue was whether it was necessary that the employees themselves should receive the remuneration for it to be taxable. He referred to the decision itself and to the subsequent consideration of that decision in Marlborough FTT, which had been approved in Marlborough UT. Mr Elliott submitted that there is a need for some form of entitlement to exist, although not necessarily a contractual entitlement. He referred to Lord Hodge’s judgment (with whom Lord Neuberger, Lady Hale, Lord Reed and Lord Carnwath agreed) at [41] where he had said “As a general rule, therefore, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party.” Mr Elliott submitted that the decision in Rangers SC does not assist HMRC in the present case.

56.

Mr Elliott submitted that we should follow the approach taken by the FTT in Strategic Branding and CIA. He submitted that the facts in those cases were stronger for HMRC, but the amounts paid to the relevant trust were nevertheless found not to be earnings within s62 (but were employment income within Part 7A).

57.

There is no basis to conclude that MC had earnings of £800,000, either on the basis of the Payment or the Loan:

(1)

Payment to Trustee – If the FTT had accepted HMRC’s submission that this was itself a reward for services, the FTT would have been entitled to conclude that this was earnings, following the approach in Rangers SC at [41]. Here, the sole reason for the Payment was to make the Loan. MC had not entered into a side letter with the Appellant, there was no entitlement to a bonus, and no expectation that the loan would be extended. Absent the required findings in relation to the Payment, Mr Elliott submitted that the Payment cannot be earnings.

(2)

Loan to MC – The FTT did find that this was a reward for MC’s services, but the FTT erred in failing to consider the amount of earnings, which are nil. The arrangements were pre-wired, and that included not only that the Loan would be made, but that MC would use the money to acquire the Shares, which were then charged as security for MC’s obligation to repay the Loan.