[2011] UKFTT 46 (TC)

TC00923

Appeal number: TC/2010/02627

Whether a loan to a participator in a close company was waived for him in his capacity as a director of the company or as the majority shareholder-whether Class 1 NICs were payable by the company on the waiver of the loan

FIRST-TIER TRIBUNAL

TAX 

	STEWART FRASER LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	S.M.G.RADFORD (TRIBUNAL JUDGE)							L.A.STALKER		

Sitting in public at Ashford, Kent on 23 November 2010

Mr Dixon of Spain Brothers & Co for the Appellant

Mr M. Musgrove for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against the Section 8 of the Social Security (Transfer of Functions) Act 1999 (“Section 8”) decisions of HMRC that the Appellant was liable to primary and secondary Class 1 National Insurance Contributions (“NICs”) in respect of the tax year 2004/05 in the amount of £10,165.77, for 2005/06 in the amount of £15,594.83 and for 2007/08 in the amount of £25,260.49.
Background and facts
2.	The Appellant is a close company which is largely family owned and during the period covered by the disputed Section 8 decisions Mr A.S.Fraser was a director and the majority shareholder of the Appellant.
3.	On 8 February 2008 an enquiry was opened by HMRC, within Paragraph 24 (1) of Schedule 18 of the Finance Act 1998, into the Appellant’s company return for the accounting year ended March 1998 to establish whether a loan of £113,006 made to Mr A.S.Fraser by the Appellant and disclosed in the Appellant’s accounts for that year as having been waived had been correctly dealt with for tax purposes.
4.	During the course of the enquiry HMRC established that Mr Fraser’s director’s loan account which had become overdrawn by £73,665 during the accounting year ended 31 March 2004 was waived on 6 April 2004; his director’s loan account which had become overdrawn by £113,006 during accounting year ended 31 March 2005 had been waived on 30 November 2005 and his director’s loan account which had become overdrawn by £183,047 during accounting year ended 31 March 2007 had been waived on 20 June 2007.
5.	When a loan, made by a close company to a participator in that company, is waived, tax is chargeable on the participator under Section 421 of the Income and Taxes Act 1988 (“ICTA”). This was accepted by Mr Fraser and the income was correctly declared on his tax returns.
6.	Section 421 ICTA refers to the sum waived being treated as income received by the participator after the deduction of income tax at the dividend ordinary rate. The section takes preference over the employment income charge under Section 188 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and exists to avoid a double charge to tax.
7.	HMRC claimed that the waiver of the loans were profits derived from the employment and therefore Class 1 NICs were due and the Appellant had not accounted for them in any of the years under appeal.
8.	In order to recover the Class 1 NICs HMRC raised the disputed decisions under Section 8 on 30 July 2008 specifying that the Appellant was liable to pay Class 1 NICs in respect of Mr Fraser’s waived loans for each year.
9.	The Appellant lodged an appeal against the decisions on 14 August 2008.
10.	The matter was reviewed by an HMRC officer independent of the enquiry and by letter dated 10 February 2010 he concluded that the caseworker involved in the matter followed the correct procedures and applied the technical arguments correctly as directed by HMRC specialists consulted. He stated that the arguments advanced by the caseworker could be supported at Tribunal and ultimately, if the Appellant could not accept the caseworker’s view which he supported, the issue would require to be addressed at Tribunal.
11.	Section 6(1) of the Social Security Contributions & Benefits Act 1992 (“SSCBA”) states that primary and secondary Class 1 NICs are payable where in any tax week earnings are paid to or for the benefit of an earner over the age of sixteen in respect of any one employment of his which is an employed earner’s employment. A primary Class 1 contribution shall be payable if the amount paid exceeds the current primary threshold and a secondary Class 1 contribution shall be paid if the amount paid exceeds the current secondary threshold.
Appellant’s Submissions
12.	The Appellant contended that the loan waivers were not derived from the employment and so no Class 1 NICs were due. The waivers of the loans were made for Mr Fraser in his capacity as the majority shareholder of the Appellant and not because he was a director.
13.	Mr Dixon submitted that Mr Fraser received a substantial salary in his role of managing director which was challenged as too high by a minority shareholder with whom Mr Fraser and the Appellant were in an acrimonious dispute.
14.	The payment of the salary to Mr Fraser was at regular intervals and he was entitled to a bonus if the Appellant met its performance targets. The waivers of the loans were not of loans withdrawn in regular sums at regular intervals hence they were not on account of remuneration. They were payments to the majority shareholder as under the Companies Act directors have no other entitlement to funds.
15.	The dispute with the minority shareholder prevented the Appellant voting dividends for Mr Fraser and instead the loans were waived for him in his capacity as the majority shareholder
16.	It was submitted by Mr Dixon on behalf of the Appellant that it was to be assumed that Section 419 of ICTA is in place to penalise the abuse of control by participators and hence the overdrawn loan accounts in relation to Mr Fraser were clearly in relation to his role as a participator and not as a director.
HMRC’s Submissions
17.	HMRC contended that the waivers were profits derived from the employment even although they were not assessable as employment income. Section 3(1) of SSCBA states that earnings include any remuneration or profit derived from an employment. For the purposes of this the waiver is a profit derived from the employment and therefore Class 1 NICs were due in respect of the waivers at the time that the loans were waived.
18.	The waivers of the loans were treated by Mr Fraser as income in the relevant years by their inclusion in his tax returns.
19.	Section 188 of ITEPA treats the write-off of a loan as earnings.
20.	HMRC submitted that no evidence had been provided to support the submission that the loans were waived because of Mr Fraser’s majority shareholding in the Appellant rather than because of his employment by the Appellant.
21.	HMRC contended that the documentary evidence produced by the Appellant showed that two of the waivers were presented at directors’ meetings and were approved by them. The minutes of the meetings state “the directors are in agreement that the loan account relating to Mr A.S.Fraser be waived”. Mr Musgrove referred to the handwritten notes by the accountants which when referring to the balances on the director’s loan accounts stated that they were to be waived.
22.	He said that the records of the Appellant’s Annual General Meeting at which the shareholders can comment on matters affecting the company were silent concerning the loan waivers. There was no payment of a dividend to the other shareholders, Mr Fraser alone benefited from the loan waiver and it had no perceived benefit to the Appellant.
23.	All the evidence pointed to the loans being waived for Mr Fraser in his capacity as a director. Had they been waived for him in his capacity as a shareholder then HMRC would have expected to see this discussed and approved at a shareholders’ meeting involving all the shareholders but no such evidence had been produced.
24.	HMRC submitted that it must apply the legislation to what did happen rather than what could have happened. As the normal route of voting dividends was not followed HMRC had to analyse the route taken and address the legislation to that route. In this matter Mr Fraser profited from the waivers of the loans and the source of that profit was the employment from which it derived. Mr Musgrove submitted that the evidence showed that the regular waiving of the loan account balances was the way in which Mr Fraser augmented his salary which dropped from £212,478 in 2004 to £50,245 in 2005.
25.	Mr Musgrove submitted that although Section 421 of ICTA referred to the sum written off in favour of the participator as income received by him after deduction of income tax at the dividend ordinary rate  this did not mean that the sum was chargeable as a dividend.
26.	Mr Musgrove drew the Tribunals attention to NIM02210 of HMRC’s National Insurance Manual (“the Manual”) which refers to the earnings of employees and office holders and states “If the employer decides not to ask the employee to pay back any part of a loan and simply writes it off without seeking anything from the employee in return for giving up the debt, the amount written off becomes earnings and will be liable for Class 1 NICs at the time of the write-off.”
27.	Mr Musgrove also referred to NIM12020 of the Manual which is headed Class 1: calculating Class 1 NICs for directors: directors loan accounts. In respect of Regulation 22 of the Social Security (Contributions) Regulations 2001 it states “If the directors make withdrawals which are not earnings or on account of earnings…..you should note that a write-off of a loan is considered to be a payments of earnings liable to Class 1 within Section 3 and Section 6 of SSCBA 1992.
28.	Mr Musgrove also produced a copy of CTM61630 of HMRC’s Company Taxation Manual which refers to the release or writing-off of a loan or advance to a participator in a close company. With reference to Sections 415 to 421 of ICTA it states “Where the participator or associate is an employee, the amount released or written off will attract Class 1 NICs if it is remuneration or profit derived from an employment (Section 3(1) SSCBA 1992).
29.	HMRC stated that Section 50(6) of the Taxes Management Act placed the burden of proof on the Appellant to displace the decisions made under Section 8 as excessive.
Findings
30.	The Tribunal found that Mr Musgrove was unable to produce any evidence to support his contention that the waivers of the loans were payments to Mr Fraser in his capacity as a majority shareholder. Hence the Appellant had not met its burden of proof to displace the Section 8 decisions.
31.	Minutes from the Appellant’s Annual General Meeting showed that the shareholders had not been consulted on the waiving of the loans for a shareholder and the dividend route was not taken. The loan waivers were approved by the directors of the Appellant.
32.	The legislation was clear. If the waivers were not in respect of Mr Fraser’s shareholding then they were an emolument of his employment.
33.	Mr Musgrove drew our attention to the cases of Shilton v Wilmhurst [1991] BTC66 and Hochstrasser v Mayes (1956-1960) 38 TC 673. In Shilton v Wilmhurst Lord Templeman referred to the case of Hochstrasser v Mayes in which Lord Radcliffe  said:
“It is not easy in any of these cases in which the holder of an office or employment receives a benefit which he would not have received but for his holding of that office or employment to say precisely why one considers that the money paid in one instance is, in another instance is not, a perquisite or profit….therefrom.
The test to be applied is the same for all. It is contained in the statutory requirement that the payment if it is to be the subject of assessment must arise from the office or employment….while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as an employee”.
34.	Mr Musgrove pointed us to the fact that the loan account showed regular deductions which Mr Dixon told us was the payment of a mortgage on a restaurant which Mr Fraser owned which we find is expenditure which would usually be paid out of regular remuneration.
35.	We accept that the ongoing dispute with the minority shareholder concerning Mr Fraser’s salary made his position difficult but we find that the waivers of the loans arose as a result of his employment and are therefore remuneration and subject to Class 1 NICs.
Decision
36.	The appeal is dismissed and the decisions under Section 8 hereby confirmed.
37.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

S.M.G. RADFORD

TRIBUNAL JUDGE

RELEASE DATE: 12 JANUARY 2011