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Peter Vaines comments on the notorious Employee Benefit Trust "Loan Charge", and two important cases for Entrepreneurs' Relief and Personal Service Companies, aka IR35 and the Intermediaries Legislation.

EBT Loan Charge

The Prime Minister recently announced that a thorough review would be made of the situation relating to the EBT loan charge which came into force on 6th April 2019. This was swiftly followed by a statement by the Chancellor of the Exchequer that he has commissioned an independent review.

It is difficult to know what to make of this. There were some really serious criticisms of the loan charge at the highest level and the matter has already been reviewed – but nothing happened.

And what about those people on whom a liability arose on 6th April 2019 under Finance (No. 2) Act 2017 Sch 12. It is the law after all.

Perhaps the Prime Minister will conclude that all the criticisms which have been made about the loan charge are well-founded and it should be withdrawn retroactively.

Or perhaps he won’t.

Entrepreneurs' Relief

Entrepreneurs’ Relief (ER) is such a valuable relief that there are constant fears that it may be withdrawn. Let us hope not. But even while it exists, the conditions for ER are being regularly stress-tested by HMRC.

One of the difficult tests for ER is whether the company has substantial non-trading activities. When ER is claimed on shares in a company, the company must satisfy the trading company definition in section TCGA 1992 s 165A(3):

“a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities”

What is meant by “other than trading activities” and what is meant by “a substantial extent” is unclear – although HMRC have unilaterally adopted 20% as being substantial. 20% of what, you may ask – to which their answer is (of course) that it depends. The respective turnover, assets, expenditure and time spent by the employee on the activities are factors which might be considered.

One particular problem relates to the accumulation of cash from the company’s trading profits. A successful trading company will naturally make profits which will result in increasing amounts of cash which has to be put somewhere and it may be invested in conventional financial investments. This is not a problem for inheritance tax business property relief because the company would still a trading company and not wholly or mainly making or holding investments: IHTA 1984 s 105(3).

However, for ER, it can be argued that if a company has more than 20% of its assets in conventional investments it could be at risk of losing entitlement. This would not be a proportionate reduction – it is all or nothing. Accordingly, the holding of cash and investments from the of the company’s successful trading carries with it a clear risk.

It is therefore interesting to read the case of Potter v HMRC [2019] UKFTT 554 (TC) where the Tribunal examined this position.

The approach of HMRC in this case was that even if the company was carrying on trading activities, the investment of its profits into bonds which represented most of the assets of the company was an investment activity, and was substantial, and this precluded the company from being a trading company.

Mr Potter was a broker and dealer on the London Metal Exchange and his company arranged credit deals for clients to engage in high value trading on the LME. These deals were complex and could take months. As a result of the crash in 2008, banks withdrew credit lines, there was little credit available and not much appetite for risk among the clients. The volume of trades declined dramatically.

The company put their available cash into some investment bonds, not because they wanted to “sit back and live off the income” but to safeguard the company’s accumulated profits until the next trading opportunity arose.

The Tribunal concluded that the expenditure and the time spent by the company’s employees on the non trading activities was nil. The company had put its money into bonds and did not do anything else in relation to them. There were no investment activities.

The Tribunal said that the assets and income position of the company were factors against trading activities, but the expenses incurred and the time spent by the employees were factors pointing towards trading activities. When one stands back and looks at the activity of the company as a whole and asks “what is this company actually doing” the answer was that the company was entirely a trading company and its activities were directed at reviving the company’s trade and putting it in a position to take advantage of the global financial conditions as they change.

Accordingly, the Tribunal found that the activities of the company did not to a substantial extent include activities other than trading activities and the shares therefore qualified for entrepreneurs relief.

This is a welcome confirmation of the position and does not conflict necessarily with the HMRC guidance in CG53116 as that concentrates predominantly on the “activities” which may be non-trading activities – rather than where there are no such activities.

Personal Service Companies

The tax position surrounding personal service companies and in particular, those relating to TV presenters, is becoming seriously confused.
It may be that the new rules which are proposed for next year will clarify the position – or at least bring a measure of certainty, despite their unpopularity and the widespread criticisms which they have attracted. (This seems to be a familiar theme just at the moment).

The latest ingredient in this particular pot is the decision of the FTT in Paya Limited, Tim Wilcox Limited and Allday Media Limited v HMRC [2016] TC03856. In a 177-page judgment following a hearing in May 2018, the Tribunal decided that IR 35 applied to two of the presenters - but not the third. The distinction surrounded the precise effect of the concept of mutuality of obligation, which is itself a controversial concept. And one of the two Tribunal judges considered that none of the presenters were within IR 35 at all.

The analysis is very comprehensive, although no reference is made to the conflicting cases of Christa Ackroyd Media Limited v HMRC [2018] TC06334 and Albatel Limited v HMRC [2019] TC07045 (Lorraine Kelly) so we are no nearer to understanding what this all really means. Maybe the Upper Tribunal in Christa Ackroyd, the judgment of which is awaited, will bring some clarity.

A particularly unattractive feature of this case was HMRC’s allegation of carelessness on the part of the advisers to the taxpayer. Having regard to the direct conflict in Christa Ackroyd and Lorraine Kelly and the fact that the Tribunal judges in this case took opposing views, it is a bit difficult to suggest that any adviser could be careless in coming to either view on this subject. The view of HMRC seems to be that you are careless, and deserving of a penalty, if you do not agree with their view.

The Tribunal did not consider that the advisers had been careless, but I doubt whether we have heard the last of this argument either.

Where the taxpayer has been careless (i.e. they had not taken reasonable care), HMRC can go back 6 years. But if their conduct had been ”deliberate” that is much more serious and they can go back 20 years – and of course the penalties for deliberate conduct are much larger than for mere carelessness.

Strangely, HMRC’s arguments in this case indicate that in their view, careless conduct is considerably more culpable than deliberate conduct. Indeed, in D Cliff v HMRC [2019] UKFTT 564 they persuaded the Tribunal that deliberate conduct does not even require carelessness. Apparently, conduct is deliberate if it is not accidental (e.g. the dog hit the send button before I could stop it), even if the taxpayer had taken reasonable care and was not careless.

This surely cannot be right, and it will be interesting to see what happens next.