Lack of trust and loan documents lead to tax liability

In Shinelock Ltd v HMRC [2021] TC08261, the First Tier Tribunal (FTT) dismissed the taxpayer’s appeal contending that a payment to a non-resident director shareholder was an allowable non-trading loan relationship deduction in computing the profits of a company.  Properly documenting the loan relationship or a deed of trust that was intended to keep beneficial ownership with an individual could have avoided a tax liability.

• Shinelock Ltd (SL) purchased a property on 31 March 2009 for £725k.
• The purchase was funded from a combination of a bank loan and funds provided by Mr Ahmed (AA), the sole shareholder and a director of SL.
• On 4 December 2014 SL disposed of the property for £1,030k.
• On 15 December 2014, a payment of £305k (the difference between purchase and sale price) was made from SL to AA (the payment).
• SL did not declare any chargeable gains on its Self Assessment tax return for the year to March 2015 on the basis that AA had Beneficial ownership of the property.
• HMRC raised an enquiry and concluded a deed of trust that secured that any gain on the disposal of the property was payable to AA was a direction for the post-tax profits of SL rather than the retention of beneficial ownership by AA.
• SL advanced the alternative position that the payment was deductible as a Non-trading loan relationship debit (NTLRD) on the funds provided by AA.
• HMRC considered the NTLRD point but concluded that there was no such debit.
• HMRC did not mention that the NTLRD claim was made late.
• HMRC issued a closure notice assessing a chargeable gain of £94,270 after taking into account incidental costs of sale and purchase and indexation allowance.
• Following an Internal review the decision was upheld.
• SL appealed to the First Tier Tribunal on the NTLRD point.

The FTT dismissed the appeal finding that:

• While the FTT does not have the necessary jurisdiction to allow a late NTLRD claim, HMRC did have discretion to do so. Concluding on whether there was such a debit would give HMRC the opportunity to use that discretion if appropriate.
• The payment was not a distribution, so could potentially be an NTLRD, as:
  • There was a contract stating SL was to pay any capital gain to AA.
  • A payment to discharge a contractual obligation cannot be said to be made out of the assets of the company as required by the distribution code.
• A loan relationship did exist between AA and SL.
• The general rule is that amounts need to be recognised in determining the company’s profit and loss for the period in accordance with Generally Accepted Accounting Practice (GAAP) to be considered as a taxable deduction.
• The claimed NTLRD had not been included in the accounts and could not, therefore, be an allowable deduction as:
  • The accounts were prepared on a net basis.
  • No figures had been returned where numbers were netted off.
  • As no figure had been included, the underlying gross amounts have not been recognised in the accounts.
  • Conversely, if £0 had been included in the accounts, the underlying gross figures would have been recognised and a deduction could be considered further.
• While the above was sufficient to dismiss the appeal, the FTT went on to consider that:
  • AA had obtained finance in his capacity as director and shareholder of the company, which distanced the payment from any loan relationship that existed between them.
  • The payment was not a fair representation of the costs of the loan to SL.
  • The agreement to pay any gain to AA could not be said to be an expense in bringing the loan into existence.
  • The payment was not made in respect of the bank finance either.

Comment

This case is a welcome reminder to document any arrangements formally and to seek appropriate advice when drafting documents.

Had the deed of trust meant that the beneficial ownership remained with the taxpayer, as intended, no UK tax would have been paid as they were non-UK resident and the NTLRD point would have been mute.

Useful guides on this topic

Loan relationships
How are loans made to and by a company taxed? What are the rules when loans are written down? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

Joint property: legal v beneficial ownership
What is the difference between legal and beneficial ownership? What are the tax consequences? Are the rules different for married couples?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Statutory Review (by HMRC)
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review? 

External links

Shinelock Ltd v HMRC [2021] TC08261