Michelle McEnroe & Anor v The Commissioners for HMRC
[2023] UKUT 255 (TCC)
Shinelock Limited v The Commissioners for HMRC
15 May 2023
[2023] UKUT 107 (TCC)
Upper Tribunal
A company sold property and paid its owner the profit. The company tried to deduct this payment from its taxes, but the court ruled it was a dividend (profit share), not a loan, meaning the company couldn't deduct it.
Key Facts
- •Shinelock Limited (Shinelock) appealed an FTT decision upholding HMRC's corporation tax assessment for the year ended 31 March 2015.
- •The assessment related to a chargeable gain on the disposal of a property, with Shinelock arguing that a payment to its controlling party, Mr. Ahmed, was a deductible loan relationship debit.
- •HMRC argued the payment was a distribution, not a deductible debit.
- •The property was purchased using funds from Mr. Ahmed and a loan from Habib Bank, with a verbal agreement requiring Shinelock to pay Mr. Ahmed any capital gain.
- •Shinelock paid Mr. Ahmed £305,000 (the Payment) representing the capital gain on the property sale.
- •Shinelock argued that the Payment was a deductible deficit under the loan relationships code, and HMRC countered that it was a distribution.
- •The FTT initially ruled it had jurisdiction and that the payment wasn't a distribution, but ultimately found that it wasn't a deductible loan relationship deficit.
Legal Principles
Jurisdiction of the FTT in appeals against closure notices is determined by the conclusions stated in the closure notice and any amendments made.
Tower MCashback LLP 1 v HMRC [2011] UKSC 19; Fidex Ltd v HMRC [2016] EWCA Civ 385; Daarasp LLP and another v HMRC [2021] UKUT 87 (TCC)
A payment made to discharge a contractual obligation may not be considered a distribution "out of assets" of a company.
FTT decision
Distributions are prevented from giving rise to loan relationship deficits by section 465(1) CTA 2009, except in tax avoidance cases.
CTA 2009
For loan relationship purposes, a security is deemed to exist where a company gives consideration for the use of money advanced without the issue of a security (Section 1114(3)).
CTA 2010
A payment is considered made "in respect of" securities if made to a person as the holder of the security (Section 1114(4)).
CTA 2010
Under CTA 2010, a distribution is treated as made out of assets of a company if the cost falls on the company.
CTA 2010
The FTT should not decide cases on issues not raised by the parties; however, there is room for an inquisitorial approach, especially concerning unrepresented appellants or where it's in the public interest.
Satyam Enterprises v Barton [2021] EWCA Civ 287; HMRC v Liam Hill [2018] UKUT 0045 (TCC); Tower MCashback LLP 1 v HMRC [2008] EWHC 2387 (Ch)
In determining whether to consider a new argument, the FTT must consider procedural fairness, avoiding ambushes, and ensuring all parties know the case they face.
HMRC v William and Hazel Ritchie [2019] UKUT 0071 (TCC)
Outcomes
HMRC's challenge to the FTT's jurisdiction was dismissed.
The FTT correctly determined that the closure notice encompassed a conclusion that no losses or reliefs existed to offset the gain, and Shinelock’s argument regarding the availability of a loss was within the 'matter in question'.
The FTT's decision that the Payment was not a distribution was set aside.
The Upper Tribunal found that the FTT erred in law by failing to consider Section 1114(3) CTA 2010 and misinterpreting Condition C of Section 1015 CTA 2010; the Payment was determined to be a distribution under paragraph F of section 1000 CTA 2010.
Shinelock's appeal regarding the loan relationship debit was dismissed.
The Payment was deemed a distribution, precluding a loan relationship debit claim under section 465(1) CTA 2009. The Upper Tribunal also found procedural unfairness regarding the FTT's consideration of certain accounting issues but this was ultimately not determinative.