In Esprit Logistics Management Limited, Mr Graham Dixon, OCUK Limited (formerly ESNET Limited), Michon Limited, Ripple Developments Limited, Mr David Wolfenden [2018] TC6517 a scheme to wipe out directors' loan accounts by waiver  did not work. The amounts waived were employment income. HMRC's Reg 80 determinations were upheld.

The facts of the six co-joined appeals were similar, between 2006 and 2009 various close company directors all had overdrawn Close Company Loans with their different companies and they individually entered into tax schemes designed by Premier/Tenon whereby their companies resolved to release each's loan account by way of reward for their services to the company.

If the planning had worked:

  • Income tax would have been paid under s.415 ITTOIA 2015: release of a close company loan.
  • It was claimed that the write off created a Loan Relationship debit.
  • Whilst NICs were paid the company received a CT deduction for both the loan relationship write off and NICs and the directors only paid tax at dividend rates.

HMRC issued Regulation 80 determinations on each company, it argued that repayment of the directors' loans by the company constituted employment income.

All taxpayers appealed. 

The FTT found that the companies were at all the relevant times close companies or that the directors in question were all participators in their respective companies and that:

  • The scheme of arrangements was the mechanism for the delivery of bonuses which were taxable as employment income.
  • The so-called waiver of the loan was, in reality, simply a reward for the director’s services and chargeable as employment income (within the meaning of s.62 ITEPA) under s.9 ITEPA
  • The arrangements did not involve a 'release' within the meaning of s.415 ITTOIA construed purposively. A 'release' means the close company agrees to release a director from his or her obligation to repay the director’s loan without the debt being repaid. If the parties exchange something of equal value there will be no release but rather a set-off.
  • On the facts of each of the appeals the transaction which took place between the company and the director amounted to a repayment of the relevant loan. 
  • The FTT also considered whether s415 could be treated as being in priority to ITEPA and following PA Holdings decided not, see Employee share scheme planning.
  • Having concluded that the amounts repaid were employment income it was unnecessary to consider whether a deduction under the loan relationships rules would have applied however the FTT did not agree with HMRC's analysis. 

Topical guides for our subscribers

Director's Loan Account toolkit
Essentials for directors covering the tax rules when you extract funds or write off loans

Close Company Loan toolkit
Tax charges on overdrawn directors' loans and anti-bed & breakfasting rules

Loan relationships
Special rules applicable to companies: how and when you can write off loans and receive tax relief

Special share schemes for employees
Considers tax planning with shares, and PA Holdings decision.

External links

Esprit Logistics Management Limited, Mr Graham Dixon, OCUK Limited (formerly ESNET Limited), Michon Limited, Ripple Developments Limited, Mr David Wolfenden [2018] TC6517

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