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

whether the transaction has a sufficient connection with an employee’s employment such that it is from an employment – there is a significant body of case law on this issue, including eg Hochstrasser v Mayes 38 TC 673 and Kuehne + Nagel Drinks Logistics Ltd v HMRC [2012] EWCA Civ 34 (“KNDL”);

whether it is a transaction of a type that gives rise to earnings – this was the issue in, eg Rangers SC, addressing whether a payment to a third party is taxable as earnings; and

once these two conditions are satisfied, what is the quantum of such earnings, ie is there an amount of earnings at all within s62(2).

There is a “benefits code” in Chapters 3 to 7 and 10 of Part 3, in which s64 provides that if the same benefit would give rise to both earnings under s62 and an amount to be treated as earnings under the benefits code, in such a case the earnings charge under s62 effectively takes priority. The amount which would otherwise be earnings under s62 will constitute such earnings, and the excess (if any) is treated as earnings under the benefits code.

Within the benefits code is a “loan benefits code” in Chapter 7 of Part 3, which applies to “employment-related loans” (as defined in s173 and s174). Section 175 then treats as earnings the difference between the amount of interest that would have been payable on the loan for that year at the official rate and the amount of interest (if any) actually paid on the loan for that year. There are exceptions to this charge in s176 to s179, and it is s178 (exception for loans where the interest qualifies or would qualify for tax relief) that applies here.

Section 188 applies where the whole or part of an employment-related loan is released or written off in a tax year and at the time when it is released or written off the employee holds the employment in relation to which the loan is an employment-related loan. In that situation, s188 treats the amount released or written off as earnings from the employment for that year.

Section 455 Corporation Tax Act 2010 (“CTA 2010”) imposes a charge to tax if a close company makes a loan to a participator or an associate of a participator.

Part 7A, which was introduced by Finance Act 2011, has since come into force. Part 7A provides that where the relevant conditions are satisfied then the value of the relevant step counts as employment income (s554Z2). Section 554A prescribes the conditions for the application of this Part, and s554A(1)(c) expressly refers to “rewards or recognition or loans” in connection with a person’s employment.

An employee is not taxable on a saving that they make as a result of being provided with the use of something by their employer, eg Tennant v Smith [1892] AC 150, where the House of Lords held that the yearly value of accommodation in which the taxpayer resided in his capacity as bank manager was not taxable under Schedule E. Lord Macnaghten expressly identified that the appellant received a benefit from having a rent-free house provided to him by the bank, but re-iterated that a person is charged to income tax “not on what saves his pocket, but on what goes into his pocket”.

An employee is not taxable under s62 by reference to the cost to the employer but only on the money’s worth of a benefit which is capable of being turned to account, eg Wilkins v Rogerson 39 TC 344.

Even if an amount is from an employment, the courts have consistently held that where a person provides full consideration in return for the use of an asset then there are no earnings. In HMRC v Apollo Fuels Ltd [2016] EWCA Civ 157 (“Apollo Fuels”) the group leased cars to employees on arm’s length terms, which included lease charges at full market value. The decision of the Court of Appeal concerned whether the “cash equivalent” of the leased car, calculated in accordance with Chapter 6, was to be treated as part of the employee’s earnings. David Richards LJ said at [3] “Goods or services supplied to an employee for full value would not ordinarily be regarded as conferring a benefit on the employee or as involving the receipt of income by him”. He subsequently confirmed, obiter, at [80] that as the cars were leased to the employees at full market value no charge to income tax would arise under s62.

In O’Leary v McKinlay [1991] STC 42, which concerned the source of payments from a settlement which were made to the taxpayer, Vinelott J held that income from the settlement was an emolument arising from his employment, and said at pg 51e “So also I think if an employer were to lend money to an employee free of interest but on terms that the loan would be employed by placing it on deposit at an agreed bank and charged as security for repayment of the loan on demand. The benefit to the employee would then be the interest earned on the deposit and nothing else”.

The conclusion that the principal of a loan is not earnings was confirmed by the Upper Tribunal in Murray Group Holdings Ltd v HMRC [2014] UKUT 292 (TCC) (“Rangers UT”). HMRC subsequently advanced a different argument before the Inner House of the Court of Session and the Supreme Court, which means that the decision of the UT on this issue was final. HMRC’s position in this appeal is inconsistent with the decision in Rangers UT where the findings of fact which had been made in relation to the loans, including that the parties expected that the loans would not be repaid at term but would be extended and form part of their estate on death, were stronger for HMRC.

The FTT used the phrase “reward or benefit” throughout the Decision for earnings. However, the FTT repeatedly identified in the reasons it gave throughout the sub-paragraphs at [36] that the loan was of “benefit” to MC, ie he had wanted it, eg in [36(1)] and [36(3)]. Similarly, the FTT made at [36(5)] what it described as the “semantic point” that someone who benefits from a trust is called a beneficiary, and 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. Mr Elliott submitted that a loan may be of benefit in a colloquial sense, but this does not determine whether there were taxable earnings. This can be seen from the authorities in relation to savings, eg Tennant v Smith, where it was held that an employee is not taxable on what is saved, only on the money’s worth.

The reasons given by the FTT conflate the positions of MC and KC in respect of the various transactions. This can be seen from [36(13)] – this refers to it being prewired that the money lent under the Loan would be reinvested in the Appellant, and to the ability to draw it out of KC’s loan account, but goes on to say that “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”. Mr Elliott emphasised that MC had an obligation to repay the Loan; it was KC that had no fetter on her right to call on the Appellant to repay the amount outstanding on her director’s loan account.