In MR Currell Ltd v HMRC [2024] UKUT 00404, the Upper Tribunal (UT) set aside a decision made by the First Tier Tribunal (FTT) due to an error of law. This resulted in the UT concluding that a payment from a company to an employee benefit trust was not earnings.
MR Currell Limited (MRCL) appealed to the UT against a decision made by the FTT which dismissed the company’s appeal against a Regulation 80 Determination and a decision made under s8 Social Security Contributions (Transfer of Functions etc.) Act 1999.
- MRCL is a successful family-based painting and decorating company.
- The company has a history of rewarding employees with performance based ‘sizeable bonuses.
- In 2010, an employee incentive arrangement was set up in the form of an employee benefit trust (EBT).
- An £800,000 contribution was made to the trust from MRCL with relevant documents suggesting the payment may be used to pay bonuses and other benefits to employees.
- Mr Currell then applied to the trust for a loan of £800,000 to buy A shares in the company from his wife.
- The interest free loan was approved and was repayable on the fifth anniversary of the date of the loan agreement.
- In the tax years from 2009 to 2019 Mr Currell continued to receive salary and dividends from the company establishing there was no withdrawal of remuneration in lieu of the £800,000 payment.
- A payment was made via bank transfer to Mrs Currell for £800,000. Mrs Currell paid the sum back to the company on the understanding this was a loan that could be repaid at any time.
The loan to Mr Currell was not repaid in 2015, HMRC had at this point opened an enquiry into the arrangements and had issued the determination. The FTT accepted that the reason for not paying back the loan was due to the risk of double taxation from tax arising on any bonuses paid to employees after the enquiry had opened.
The FTT originally determined that the purpose of the payment from MRCL to the trust was a reward or benefit to Mr Currell for his services provided to the company and was taxable as earnings.
MRCL appealed the decision on the basis that there was an error of law and neither the payment of £800,000 or the susequent the loan constituted a reward or benefit within the meaning of s62(2)(b) Income Tax (Earnings & Pensions) Act 2003.
S62(2)(b) defines earnings as “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”.
HMRC argued that:
- The FTT had concluded that the payment to the trust was earnings as opposed the loan being earnings.
- The arrangements were ‘prewired’ in a manner that allowed Mr Currell to divert income that constituted reward for services.
- The company continued to pay bonuses to employees in the years after the arrangement was set up, undermining the purpose of the EBT to act as a pot for employee bonuses.
- Although the loan had been lent back to MRCL by Mrs Currell, Mrs Currell could draw down her Directors Loan Account giving mutual enjoyment of the funds.
In relation to the original FTT conclusion, the UT found:
- Both parties were unable to agree on whether it was the initial contribution of £800,000 or the subsequent loan that fell under the category of earnings in the FTT conclusion. The FTT's repeated reference to 'it' instead of 'payment' or 'loan' appearing to confuse the matter.
- The FTT concluded it was the payment to the trust and not the loan that constituted earnings. The FTT identified the payment from the company to the trust was reward for Mr Currell’s services.
- The FTT conclusion determined the payment to be comprised of earnings under s62(2) generally as opposed to the specific point of legislation at s62(2)(b).
The UT concluded that there was an error of law; as the FTT had decided that in the ‘vast majority of cases’ a loan provides a benefit or reward for the borrower, yet, the UT found there was an obligation to repay the loan and Mr Currell had a liability to the trustee, overriding any benefit. He had also used the loan to purchase shares in the company and the funds were not at his disposal for enjoyment.
They also determined that despite the FTT findings that the arrangements were ‘prewired’ the payment to the trust from the company did not constitute earnings.
The appeal was allowed and the decision set aside.
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MR Currell Ltd v HMRC [2024] UKUT 00404
