A taxpaying company has lost its appeal at the Upper Tribunal (UT) concerning the treatment of a payment made to a shareholder that had stated that the payment was in relation to a loan. The company had previously lost its case at the First-tier Tribunal (FTT) but on losing its case again the UT overturned some of the FTT’s decisions.
The tax paying company had acquired a residential property and this property was used to generate rental profits. After holding the property for a few years, the company then sold the property and realised a gain. The company held that the gain was offset by a loan relationship debit as the company had orally agreed to pay the gains to the shareholder in return for it providing financial assistance to the company. There was no documentation for this loan agreement.
The UT first of all dismissed HMRC’s counterappeal that the FTT didn’t have jurisdiction to hear the case as the UT found that the matter of whether the taxpayer could claim a deduction for a loan charge was within the ‘matter in question’ before the FTT.
The FTT had found that the payment was not a distribution, ie a non-tax-deductible payment from the company to the owners. The UT overturned this decision finding that the FTT had misunderstood the meaning of the legislation, a material error in law. A distribution is automatically excluded from being deductible as a loan charge if it meets certain criteria. The UT found that the oral contract represented ‘Special Securities’ as defined under the relevant legislation. It was a Special Security as the amount payable was by reference to the gain made on the disposal of the residential property. The FTT had found that the company’s trade was that of earning rental profits and that the gain was a one off so didn’t fall within the definition. The UT disagreed and noted that the legislation referred to the business of the company rather that its trade, business being a much broader concept than trade, and the gain on the disposal was within the definition of ‘any part of the company’s business’.
This was enough to dismiss the company’s appeal but since other grounds were argued the UT commented on the submissions. The UT noted that the FTT had dismissed part of the company’s case using reasons that hadn’t been pleaded by HMRC and that the company only heard about on publication of the FTT’s decision. The UT found that this was unfair on the company since it did have not chance to comment the reason and justice wouldn’t have been fairly given to the company but since the company had lost on the distribution point the issue was moot.
The decision can be found at: Shinelock Limited v The Commissioners for HM Revenue and Customs [2023] UKUT 00107 (TCC) – GOV.UK (www.gov.uk)
This case highlights that decisions at the FTT can be materially incorrect. The UT overturned the main focus of the original FTT decision and also found that the FTT had acted in an unfair manner. While the result was the same for the taxpayer the UT decision is good as it clarifies basic points about distributions that if left standing the FTT’s decision would have muddied.
Please contact us if you have any questions about the tax treatment of any payments, we are experienced with these matters and some, especially on shareholder loans, can be complicated.
