In Hexagon Properties Ltd v HMRC [2022] TC08468, the First Tier Tribunal (FTT) found that the write off of a loan relationship debt was not subject to tax under the loan relationship code as the profit which arose related to a compensation claim brought by the taxpayer against their bank and not to the debt.

  • Hexagon Properties Ltd (Hexagon) brought a claim against their bank for mis-selling an interest hedging product.
  • As part of the settlement of that claim, the bank released debt of £3.5m.
  • Hexagon filed their corresponding tax return on the basis that the debt release represented a payment in settlement of the claim. It was therefore a capital receipt outside of a corporate tax charge under the loan relationship rules.
  • HMRC enquired into the tax return claiming the amount of the debt release was taxable as a loan relationship profit.
  • Hexagon Appealed.

The FTT allowed the appeal finding the write off was not a profit from a loan relationship.

  • While the debt release could potentially be taxed under the loan relationship code as:
    • Hexagon were party to loan relationships with the bank.
    • The settlement agreement involved the release and discharge of a loan relationship.
    • The settlement resulted in Hexagon exchanging its right of action for damages for the debt release which fell within the definition of ‘related transaction’ in the loan relationship code.
    • The economics of the transaction, that the debt release was settlement for the banks liability, was not relevant to the question of whether there was a loan relationship (or related transaction).

The profit arising did not arise in respect of the loan relationship. This was because:

  • A ‘direct causal connection’ is required for profits to arise from a loan relationship.
  • The profit generated by the £3.5m debt release had no direct causal connection with a loan relationship as:
    • It was a result of Hexagon’s claim for damages.
    • GAAP compliant accounts correctly identified the amounts as a receipt of compensation.

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?

Loan relationships toolkit: Is a balance within the rules?
When does a balance fall within the loan relationship rules?

How to appeal an HMRC decision
Disagree with an 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?

External links

Hexagon Properties Ltd v HMRC [2022] TC08468

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