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Matthew Hutton, Presenter of the ‘Private Client Monthly Tax Update’ Webinars, reports on a recent case regarding Income Tax relief on loan interest paid.

Context

The relief provided by ITA 2007 ss 383/392 (formerly TA 1988 ss 353/360) for interest paid by investors on loans to fund acquisitions of interests in certain kinds of close company is a valuable one and serves important commercial purposes in developing such businesses and facilitating succession.

These relieving provisions have not been the subject of much litigation over time. However, the recent case of Torkington v HMRC [2009] TC 5024 before the First-Tier Tribunal in Liverpool provides a rare opportunity to illustrate the true breadth of the legislation.

Torkington v HMRC: The Facts

Mr Torkington borrowed funds from a third party lender and lent them to W, a close company, trading in the field of design and construction, in which he had a material interest. W immediately lent the funds at a higher rate of interest to a Canadian resident company, WC, which used the money to fund a construction project in Canada. Although W and WC were under common control in the past, by the time of the investment they were not. The Board of Directors of W decided to make the loan to secure the 3% profit turn on the interest paid by WC and to benefit from the provision of design work on the Canadian project of WC; both expectations were realised in fact.

Mr Torkington claimed interest relief under ICTA 1988 s 353 on the grounds that W was a close company falling within ICTA 1988 s 13A(2) and had used the money lent wholly and exclusively for the purposes of its business, so that ICTA 1988 s 360(1)(b) applied.

HMRC enquired into Mr Torkington’s return. In due course the enquiry was closed, refusing relief on the grounds that the money lent had not been used in the trade of W because it did not carry on a trade of money lending, and that the company that had used the money in its trade, WC, was not a close company because it was resident in Canada. Mr Torkington appealed, and following an internal review which agreed with HMRC’s contentions, the case was listed for appeal in the standard track of the FTT.

The Decision (First-tier Tax Tribunal)

The Tribunal allowed Mr Torkington’s appeal on the ground that all the relevant conditions of ICTA 1988 s 360 were satisfied. HMRC are not appealing further.

The case brings out the true meaning of some aspects of the legislation and demonstrates that some long-held interpretations on the part of HMRC are wrong and unduly restrictive.

Conclusions

In conclusion, Torkington v HMRC is a notable and welcome clarification of the breadth and scope of this important relief, illustrating the commercial common sense of Parliament when it tried to encourage individuals to invest in small companies.

In particular, the case confirms that for the purposes of achieving relief under ICTA 1988 s 360(1)(b) and its successor legislation at ITA 2007 s 392(2)(b):

• It is use of the borrowed monies by the debtor company alone that is relevant.
• There is no requirement that the borrowed monies are used in the trade of the debtor company.
• The debtor company does not have to carry on a trade.
• The test is use of the borrowed money for the purposes of the business of the debtor company.
• There is no link between the terms of ICTA 1988 s 13A(2) and the word ‘business’ in the relieving legislation,
• The word ‘business’ in ICTA 1988 s 360 and ICTA 1988 s 392 has a very wide and unrestricted meaning.
• Lending the borrowed monies on again on commercial terms can be an acceptable use of the monies even if the second debtor is not a close company falling within ICTA 1988 s 13A(2).
• If the borrowed monies are lent on again on commercial terms, there is no need for the lender to be carrying on a money lending trade.

(Contribution by Andrew Gotch of Tax Fellowship, who appeared for the taxpayer, Torkington v HMRC [2009] TC 15024)

Further observations

Note that Income Tax relief for interest paid is not generally given to trustees.

About Hutton Webinars

Continual difficulties and hassles of travel to a lecture/conference venue and costs constraints have led to the increasing popularity of the Webinar as a forum for delivering information in a cost-efficient and effective way. This is a facility which Matthew is now offering to his clients. All you need to attend is a PC or a Mac with Internet access.

Starting on Wednesday 19 January 2011, Matthew will be running a monthly 75-minute Private Client Tax Update webinar at lunchtime (1.00 - 2.15pm) to cover all that you need to know to advise your clients more effectively, in terms of Decided Cases, Legislative Changes, HMRC Practice and Tax Planning Tips and Traps. The attached flyer and registration form gives the prices and further details. Note that, for registrations received by Matthew before 1 January 2011, there is a 10% discount on all the prices.

For further information, see: Private Client Monthly Tax Update 2011 Webinars

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