UK and International Tax news

FTT Decision In Loan Relationships And Unallowable Purpose Case

Thursday 11th April 2024

The FTT has recently issued its decision in a case involving whether the write off of part of a loan made by one company to another company had an unallowable purpose under the loan relationship rules.

In Keighley and Primeur v HMRC [2024 UKFTT 30 TC], the FTT had to consider appeals in respect of certain income tax and NIC matters as well as whether a corporation tax loss on the partial write-off of a loan between two companies should be disallowed either on the basis that the borrower and lender were connected companies or, failing that, under the unallowable purpose rule.

Keighley owned shares in the company (Primeur) and he, as well as another shareholder [B] owned shares in a second company (VDP). Under the VDP shareholders’ agreement, consent of a third individual shareholder was required for a number of actions.

Primeur and its shareholders made loans to VDP. Primeur’s loan was secured over a property owned by VDP. Following the sale of the property, there were insufficient funds for VDP to pay its debts in full and instead of Primeur being paid in priority, as was its entitlement as the secured lender, Primeur wrote off part of its loan so that its shareholders could be repaid in full.

With regard to the connected companies’ issue, Primeur and VDP were each owned by a different group of individual shareholders although Keighley and B held a majority shareholding in each. HMRC argued that where two people are alleged to control a company, they must ‘act as one’ but the FTT did not agree. According to the FTT, one simply looked at whether the rights attaching to the shares, the articles or the shareholders’ agreement gave the two people the power to secure that the affairs of the company were conducted in accordance with their wishes. In this case, consent of a third shareholder was required for various actions under the VDP shareholders’ agreement, and the FTT concluded that the two companies were not connected.

On the unallowable purpose issue, the FTT found that the partial write-off of the loan had an unallowable purpose, not because the company writing off the loan did so to secure a tax benefit, but because it did so to ensure Keighley and B could be repaid fully to reward them for work done securing a good deal on the sale of the property by VDP. This purpose was not amongst Primeur’s commercial or business purposes.  The FTT found submissions made by the taxpayer on the purpose of entering into the loan relationship in the first place irrelevant. In addition, it was clear that the loan was secured and had to be repaid on the sale of the property.

The FTT also made some interesting observations in relation to penalties and whether the company or a person acting on behalf of the company had been careless or failed to take reasonable care. In this case, the company was advised by its accountants in relation to the tax treatment of the loan write off, as well tax counsel, and both considered the unallowable purpose issue was irrelevant.

The FTT held the view that the failure to address this issue in the advice was sufficiently careless to justify the extension of the discovery window from four to six years allowing HMRC to raise a discovery assessment.

For more information on the above case, please contact Keith Rushen on 0207 486 2378.

 

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