Lack of loan relationship accounting entries means no tax relief

In Shinelock Limited v HMRC [2023] UKUT 107, the Upper Tribunal (UT) found that a loan relationship debit requires recognition in the Profit & Loss Account in order to be taken into account for Corporation Tax purposes. Instead, the payment was a distribution.

• Shinelock Ltd was a Property rental company owned by one director/shareholder, Mr Ahmed, a non-UK resident.
• In 2009, a property was acquired. The deposit was paid by Mr Ahmed and Shinelock was registered as the owner. As part of a verbal contract, it was agreed that any 'capital gain' made on the property would be paid to Mr Ahmed in return for financing.
• During the property ownership, it was rented out and the rental income was paid into an account specified by Mr Ahmed, over which Shinelock had no control.
• When the property was sold, Shinelock paid the net gain to Mr Ahmed. No Disposal was reported in the company tax return. Mr Ahmed reported the disposal in his UK Self Assessment tax return but no tax was due as he was a non-UK resident and the disposal occurred before the non-resident rules changed for disposals of UK property.
• HMRC opened an enquiry into Shinelock's accounting period ended 31 March 2015 and concluded that it was the beneficial owner of the property. A Closure Notice was issued, which was upheld on review.
• Shinelock appealed on the basis that:
  • It was not the beneficial owner of the property.
  • The gain was equal to the amount owed in loans to Mr Ahmed.
• The FTT dismissed the appeal, finding that there was no Distribution but there was also no Loan relationship debit to be brought into account either.
• Shinelock appealed to the UT.

The UT found that:

• Contrary to the FTT's findings. the payment of the gain was:
  • 'An interest or distribution out of assets of the company' and relate to special securities as per s.1000, para F CTA 2010, which defines corporate distributions. Special securities include where consideration is given that is dependent on the results of the business.
  • The parties had already agreed the payment was 'out of assets' and there was a security (consideration given for the use of money advanced).
  • The FTT had erred in law in finding that the payment was not dependent on the results of the company. Even though the asset was owned for a number of years before disposal which was a one-off, the profit still made up 'the results' of the business.
• The UT remade the FTT decision and held that the payment was a distribution under para F, s.1000 CTA 2010.
• The UT did consider the loan relationship aspects of the appeal. It concluded that s.307 CTA 2009 governs the general principles for bringing loan relationship credits and debits into account for tax purposes. The section states that debits and credits must be those recognised in the Profit and Loss account of the company as prepared in accordance with GAAP.
  • The company accounts did not recognise the gain on the property or the payment to Mr Ahmed in the P&L, partly due to the fact that it did not consider itself to be taxable on the disposal.
  • The FTT had been generous in its approach in saying net entries could be said to recognise the debit, however, there were no entries at all so no amount was recognised in the accounts.

The appeal was dismissed on the grounds that the payment was a distribution.

Useful guides on this topic

Loan relationships
What is a loan relationship? How are profits and losses made from loan relationships taxed? What happens if loans are written down or written off? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

Dividend Tax
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

Non-resident CGT: UK property
How and when does Capital Gains Tax apply to non-residents owning UK property?

External link

Shinelock Limited v HMRC [2023] UKUT 107