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

The FTT addressed the reason(s) for the making of the Payment at [29] to [32] and the reason(s) for making the Loan to MC at [38] to [55]. The Appellant’s submissions as to the Decision having involved an error of law were based on the FTT’s consideration of the intervening question the FTT had posed as “Was the loan a reward or benefit?” at [33] to [37] and we set out those paragraphs in full:

“Was the Loan a reward or benefit?

33.

Before we consider the reasons why the Loan was paid to MC, we first need to consider whether, as a matter of law, a genuinely repayable loan can be a reward or benefit in the first place (whatever the reasons for its payment), and more importantly whether the Loan was a reward or benefit in this case.

34.

Mr Elliott submitted that a genuinely repayable loan could not be a reward or benefit as a matter of legal principle, and this was demonstrated by the Baxendale Walker cases. However, later in his submissions he accepted that the Loan was of temporary benefit to MC.

35.

He also submitted, contrary to the submission made by Mr Waldegrave, that Rangers did not show that a repayable loan could be a reward or benefit.

36.

It is our view that a genuine loan of money (“a money loan”) with real repayment obligations can, as a matter of legal principle, comprise a reward or benefit. And in this particular case, the Loan was a reward or benefit. We say this for the following reasons:

(1)

In nearly all cases a money loan is sought by the borrower. It is not imposed by the lender. This of itself suggests that the borrower considers a money loan to be of benefit to it. And this is the case whatever terms of that money loan. Consider someone buying a house with a mortgage. That person will, over the term of the mortgage, pay back considerably more than the capital borrowed. The borrower receives a considerable benefit since without it he or she could not afford to buy the house for which it is borrowed. That mortgage is a benefit even though it is on full commercial terms.

(2)

In general terms, a money loan provides money which the borrower would not otherwise be able to access. Or it provides money as an alternative source of funds which the borrower considers a more attractive proposition to using alternative funds. For example, if one can borrow at 2% but then invest at 5% a person might borrow even if it was sitting on cash which it could also invest. Indeed, borrowing might be a simple way of gearing up to increase investment return.

(3)

It seems to us that whilst it is impossible to describe the infinite number of reasons why a borrower might seek a loan, a common denominator is that the borrower benefits from that loan. And this is true whatever the terms of the loan.

(4)

Mr Elliott suggested that the Loan was only a temporary benefit. We will consider whether five years is temporary in a moment, but a money loan even for a short time can confirm a permanent benefit or advantage on the borrower. Consider a company in cash flow difficulties which is about to go into an insolvency process. A money loan repayable a month later might solve those cash flow difficulties and enable the company to survive. That is a permanent benefit. A person might seek a money loan in order to exploit a commercial opportunity, which, once exploited, might provide benefits well into the future. In this case the Loan was used, as always intended, as working capital in the company’s business as it was paid into the company by KC as a director’s loan account. That was a permanent benefit to the company.

(5)

There is also a semantic point. It is no coincidence that someone who benefits from a trust is called a beneficiary. It is because that person benefits from the trust fund. A payment out of the trust fund confers a benefit on the recipient, and a money loan, on whatever terms, to a beneficiary is just such a benefit.

(6)

As far as case law is concerned, we do not think that it is clear from either Rangers, or the Baxendale Walker cases, that a repayable loan cannot be a reward or benefit.

(7)

In Rangers the loans were repayable, and Lord Hodge found that they were a component of the redirected earnings. However, it is certainly not authority for the proposition that a repayable loan can never, as a matter of law, be a reward or benefit.

(8)

Nor do we think the same is true of the Baxendale Walker cases. In those cases, the judges, in our view, elided the analysis of whether a loan could be, as a matter of principle, a reward or benefit, with their analysis of whether in those particular circumstances, it provided a reward or benefit for services supplied by the relevant director. If the ratio of those cases was that as a matter of legal principle a genuinely repayable loan could not be able to benefit, we disagree with it for the reasons set out above. In our view such a money loan can as a matter of law be a reward or benefit.

(9)

Turning now to the Loan. This was repayable only after the fifth anniversary, and provided MC was not a bad leaver, carried no obligation to pay interest. Whilst it was repayable after that date, repayment was not demanded by the Trustee save as regards the £50,000 in 2019.

(10)

We accept it was a genuine loan with a real repayment obligation. We also accept that MC had the independent funds to settle it once that five year period ended. We also accept that he was fully conscious of his obligation to repay on that date.

(11)

That notwithstanding, it clearly conferred a benefit on him. This is true both subjectively and objectively. It is clear from the evidence that the possibility of making a loan to MC once the EBT had been established had been discussed for some months before it was set up in November 2010. It was MC’s evidence that taking a loan from the EBT was something that was attractive to him, and that it was financially advantageous compared with borrowing from a commercial lender. Indeed, we ask ourselves, if MC did not think it was of benefit to him, why did he apply for a loan in the first place.

(12)

We have no doubt that an employee of the company, such as a contract manager, who applied for a loan from the EBT would consider that if a loan was made in his or her favour, that would be a benefit.

(13)

But objectively too, the Loan conferred a benefit on MC. It provided him with the sum of £800,000. Although the ostensible purpose of the Loan was to purchase the shares from KC, the reinvestment of that money into the company, and the ability to draw it out of KC’s directors loan account cash free, had been prewired into the arrangements. The Loan had to be reinvested in the company which needed it as working capital. But the benefit to MC was that it could then be withdrawn and used as he wished. There was no fetter on the use of the money withdrawn from KC’s loan account.

(14)

There was no obligation on MC to repay the Loan for five years. We do not consider this to be a mere temporary benefit. Indeed, as at the date of the hearing, only £50,000 of that £800,000 had been repaid. Whilst we have accepted that one reason for that is the double tax concern, it still means that MC has had the benefit of £750,000 for almost 13 years. Again, we do not consider that to be a temporary benefit.

(15)

There is also benefit in that there was no obligation to pay interest. It is clearly better not to pay interest than to pay tax on interest foregone. A payment of interest of 10 is greater than a tax charge of 4. And indeed, the arrangements meant that there was no obligation to pay tax at all as the Loan was used, initially, to purchase KC’s shares. However, as we have already found, it was always intended that the money would find its way back into the company and be used as working capital. And to be available for withdrawal without a tax drag. When considering the facts realistically we find that this ultimate use of the Loan was also an objective benefit to MC.

37.

In summary, therefore, it is our view that as a matter of law there is nothing which prevents a genuine money loan on commercial terms conferring a benefit on the borrower. It is our view that in the vast majority of cases in practice, such a loan will confer a benefit. And in the context of this case, the Loan conferred a benefit on MC. Its payment to MC, therefore, was potentially within the ambit of section 62 ITEPA Whether it was earnings depends on the substantial reason for its payment.”

The FTT referred above to what it had defined as “the Baxendale Walker cases” and both parties referred us to those cases in the context of their submissions on re-making the decision. For convenience, we reference them here. Those cases are Marlborough DP Ltd v HMRC [2021] UK FTT 304 (TC) (“Marlborough FTT”), which on this issue has been upheld by the UT since the date of the Decision in HMRC v Marlborough DP Ltd [2024] UKUT 98 (TCC) (“Marlborough UT”), Strategic Branding Ltd v HMRC [2021] UKFTT 474 (TC) (“Strategic Branding”) and CIA Insurance Services Ltd v HMRC [2022] UKFTT 144 (TC) (“CIA”).