UK and International Tax news
FTT Decision In Loan Relationships Case
Wednesday 22nd August 2018
The FTT has recently published its decision in a case involving loan relationships and whether impairment debits were deductible for corporation tax purposes.
In CJ Wildbird Foods Limited v Comms for HMRC [UKFTT 2018 – 0341], the appeal concerned a series of inter-company loans advanced by the appellant, to a company in which it held a 50% share, over the years ended 31 March 2013, 2014 and 2015. These loans followed loans advanced over the previous six years.
The issue in dispute was whether, as a result of these loans and in the light of the surrounding circumstances, the appellant had loan relationships in respect of them for the purposes of Part 5 CTA 2009 such that a debit should be allowed to it in respect of the impairment of those loan relationships.
The appellant had made the loans available under a working capital facility. Each loan was subject to interest payable quarterly and was subject to repayment on demand.
By 31 March 2015, the amount of the accumulated debt due from the borrower was £1,517,643 and advances in the years to 31 March 2013, 2014 and 2015 of £151,188, £150,388 and £150,388 respectively. No interest has ever been paid by the borrower nor had it ever repaid any of the money advanced to it.
The borrower’s financial position was such that it unable to pay any interest and none had ever been accrued in the accounts of either company. There was an understanding that if and when it was possible to generate income in the borrower, or sell it, the debt and accrued interest would be paid out before any remaining funds were shared between the shareholders.
In each of the corporation tax returns for the 2013, 2014 and 2015 accounting periods, the appellant claimed a non-trading loan relationship debit equal to the amount of the loan advanced during that year, on the basis that the loan was unlikely to be recoverable “in the short term” and it was therefore fully provided for in the appellant’s accounts.
HMRC opened enquiries into the appellant’s corporation tax returns and whilst not disputing the accounting treatment, closed their enquiries by amending the returns to add back the loan relationship debits on the grounds that there was no loan relationship between the appellant and the borrower because neither of the conditions in s.302 (1)(a) and (b) were satisfied. These refer to ‘money debt’ and ‘the lending of money’.
In allowing the appeal, the Judge disagreed with HMRC’s arguments, in particular with their view that, at the time each relevant payment was advanced, the loan was not a money debt, the borrower could not have repaid it or the interest on it and had no plausible plan for doing so it cannot properly be said that the resultant debt “arose from a transaction for the lending of money” for the purposes of s. 302(1)(b).
The Judge commented that “the modern business world has many famous examples of companies, especially in the technology sector, with no cash and no immediate prospect of generating a profit which go on to be very successful. Clearly the appellant considers the borrower potentially to be such a company and is therefore prepared to subsidise its running costs by way of loan for the time being in the hope of obtaining repayment of some or all of its loans in due course, possibly with a gain on its share investment as well”.
He added “that as far as hallmarks are concerned, there is no requirement that for a loan relationship to exist, interest must be charged; were it otherwise, many perfectly normal intra-group loans would fall foul of that requirement (and in this case there was contractual obligation to pay interest, albeit an obligation that has not yet been enforced. There is also no requirement that, for a loan relationship to exist, the lender must have any degree of certainty that the debt will be repaid. Normal commercial loans are inherently hedged about with uncertainty about whether repayment will be made and save in degree, the present situation is no different. Lack of a fixed repayment date for a loan is perfectly commonplace”.
It should be noted that there was no argument that the impairment debits should be disallowed under transfer pricing rules whilst the FTT said that the advances were commercial. In particular, if the loans were within the scope of transfer pricing rules, the impairment debits may not be deductible if the extended ‘acting together’ meaning of connection argument was put forward.
In addition, if there was no real prospect of repayment of the loans, would the lending fall within the business/other commercial purposes of the lender. If not, then the unallowable purposes rule could apply to disallow the impairment debit.
If you would like further details of this case, please contact Keith Rushen on 0207 486 2378.