Currell [2023] UKFTT 613 (TC) is another example of the long shadow cast by the Supreme Court decision in Rangers (2017).
The facts were reasonably simple. A company paid £800,000 to an Employment Benefit Trust (‘EBT’) which had been established with the purported aim of establishing a fund for the future payment of discretionary bonuses to key employees. The entire sum was immediately lent to the owner of the company (‘Owner’), interest-free and repayable after five years. Owner used the money to buy shares in the company from his wife, and his wife loaned the money back to the company. The use of the loan to purchase shares seems to have been a ‘bolt-on’ designed to avoid a charge to tax under the ‘beneficial loan’ provisions: it appears that the money would otherwise simply have been loaned back to the company by Owner.
HMRC contended that the £800,000 payment was to be treated as earnings of Owner and that Income Tax and National Insurance Contributions were due.
The company asserted that ‘the relevant legislation does not tax the receipt of the capital of a loan used to purchase shares in a close company’. The problem, from the company’s point of view, is that the truth or untruth of that assertion is irrelevant. HMRC were not suggesting that the loan made by the EBT to Owner was earnings: their argument, consistent with the Rangers case, was that the contribution made by the company to the EBT was. HMRC’s case was that ‘when viewed realistically the arrangements were a device to put money into the unfettered control of [Owner]’.
The First-tier Tribunal (‘FTT’) correctly recognised that the key point was to ‘establish the reason or substantial reason why the Payment of £800,000 was made by the company to the EBT’. If ‘as a reward or benefit for the services provided by [Owner] to the company, then it is earnings’. In making that enquiry, it was appropriate to consider subsequent events, including the making of the loan, the purchase of shares and the loan back to the company.
It’s possible to speculate that if the £800,000 contributed to the EBT had eventually been used to pay bonuses to key employees, the fact that part of the fund had initially been lent to Owner for a short time would not of itself necessarily have impelled the FTT to the conclusion that the contribution was an emolument of Owner. But in fact, the bonuses in question had only ever been a few tens of thousands of pounds a year: and once the £800,000 had been lent to Owner on a five-year term, there could be no question of the EBT’s paying bonuses unless Owner chose to repay early.
Hence the FTT concluded that the real and substantial reason for the company’s making the contribution to the EBT was not to provide a pot of money out of which to pay bonuses to staff members: it was to allow the EBT to lend £800,000 to Owner.
However, at this point the FTT’s analysis gets slightly confusing. Having decided why the contribution was made, it asks why the loan was made, concluding that ‘the only reason was because of the work which [Owner] had done over the years in building up the business firstly as a sole trader, then in partnership, and then via the medium of the company.’ It concludes:
‘We have found that it was inevitable, at the time at which the Payment was made by the company to the EBT, that it would be paid by the Trustee to [Owner] by way of the Loan. We have also found that it was more likely than not that the Loan was paid to [Owner] as a reward for the services which he had provided to the company. … In these circumstances [it] is our view that the Payment, therefore, was paid by the company as a reward for the services supplied by [Owner] to the company. It therefore comprises earnings and thus [is] taxable as asserted by HMRC.’
This is not very happily expressed: the fact that the Loan made by the EBT was paid as a reward for services cannot logically support the conclusion that the Payment made to the EBT was earnings, especially in the light of what the FTT had previously said was the purpose of the Payment. It seems that what the FTT meant to say was that the Payment was earnings because it was always intended that the £800,000 would be at the disposal of Owner as a reward for his services. The Loan merely evidenced the intentions lying behind the making of the Payment.
Be that as it may, the outcome is that the scheme, like many schemes along these lines, did not work.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
