In Nicholas Powell v HMRC [2025] TC09518, the First Tier Tribunal (FTT) found that an Income Tax charge arose on the novation of a director’s loan account from one company to its parent. Under the novation deed, a loan to a participator had been released.
Nicholas Powell (NP) was a director and sole shareholder of Thermoline Limited (Thermoline), a Close company.
- NP had an overdrawn Director’s loan account with Thermoline. As of 31 December 2020, the balance owed to Thermoline was £512,714.
- Thermoline correctly accounted for S.455 tax on this loan account.
- On 2 July 2020, following a Share-for-share exchange, Property Holding SW Limited (PHSW) became the holding company of Thermoline.
- On 16 March 2021, NP, Thermoline and PHSW entered into a novation deed which was deemed to take effect on 31 December 2020.
- Under the terms of the novation deed, NP’s liability for the director’s loan account was transferred to PHSW.
- This was achieved by releasing NP from his debt to Themoline and substituting PHSW as the lender.
- PHSW simultaneously became liable to pay £512,714 to Thermoline via an inter-group loan account.
- NP’s tax return for the 2020-21 year was submitted, declaring that he had received no deemed payment of dividend income.
- HMRC issued a Closure notice in March 2023, on the basis that NP was subject to tax on a deemed payment of dividend income of £512,714, owing to the loan’s novation. This resulted in Income Tax of £194,581.
- NP Appealed to the First Tier Tribunal (FTT).
Under S.415 ITTOIA 2005, an Income Tax charge arises on the release or write-off of a debt, where the creditor company is, or was, chargeable to tax under s.455 of CTA 2010 in relation to the debt.
NP argued that as the release under the novation deed was made for valuable consideration, there was no taxable receipt. The valuable consideration was the payment from PHSW (via the creation of the inter-company debt) for the rights and obligations previously owned by Thermoline, in respect of NP’s debt.
The FTT found that:
- S.415 ITTOIA 2005 had to be interpreted based on its purpose.
- Collins v Addies (Inspector of Taxes) [1992] STC 746 (Collins) established that the purpose of s.415 was to tax distributions made by close companies through the release (in the ordinary sense of the word) of obligations to repay sums advanced to, or otherwise due from, participators.
- Collins also made clear that where a debtor is released from a debt as the natural and ordinary consequence of having repaid or satisfied the debt, section 415 ITTOIA would not apply.
- For this purpose, a debt could not be said to be satisfied where the sum remained outstanding.
- While cash or physical assets may satisfy a debt, the right to call on another person in connection with the debt would not satisfy it.
- A release will be taxable even where there is valuable consideration in a contractual sense, unless that consideration results in there being no outstanding obligation on any party in respect of the debt or any similar sum.
- Only where there is no debt owed by any party can it be said that there has been no distribution by the close company.
- Thermoline had not recovered its money. An outstanding obligation remained from PHSW of the precise amount from which NP had been released by Thermoline.
- There was a substitution of one debtor for another. An outstanding obligation to the original creditor of a similar sum (the value of the novated debt) remained.
- PHSW’s liability to Thermoline could not be said to satisfy the debt owed by NP. It arose in consequence of an associated transaction (the transfer of a bundle of rights and obligations to PHSW).
- The fact that Thermoline had no right to pursue NP, having sold its interest in the loan to PHSW, did not mean that the debt was satisfied.
- On both 31 December 2020 and 16 March 2021, £512,714 remained outstanding to Thermoline. Thermoline had not recovered its money
NP had been released from his debt to Thermoline, a close company in which he was a participator. S.455 CTA 2010 had applied in respect of the advance made to NP. As such, s.415 ITTOIA applied to the debt release.
The appeal was dismissed.
Useful guides on this topic
Directors' loan accounts: Toolkit (subscribers)
What is the tax treatment for an overdrawn director's loan account? What are the consequences of an outstanding loan to a participator?
Close companies, definitions & control
What is a Close company? What are the tax consequences? What is a Participator? What is meant by Control of company? What are the tests for Control?
Loans to participators (Close Company Loans toolkit)
What is the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder)? How do the 'bed and breakfasting' rules work? What are the concerns with indirect loans, upstream loans and MBOs?
Reorganisations & Reconstructions
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