Painting and decorating company wins its appeal at the Upper Tribunal on EBT decision

Justine Riccomini explains the outcome in the case of a painting and decorating company which had set up an EBT into which a substantial payment was made by the employer and then lent to the Director.

Background

The decision in the case of MR Currell Limited v HMRC was released by the Upper Tax Tribunal (UT) on 6 December 2024. This case concerns the Employee Benefit Trust (EBT) which had been implemented by the company in 2010 and a payment of £800,000 was paid into the Trust by the employer. HMRC challenged the payment and determined that the entire reason for the original payment into the EBT was to give a loan of the same amount to a director, which was a reward for services.  

The arrangements

HMRC reviewed the payment of £800,000 from MR Currell Ltd into the MR Currell Limited Employee Benefit Trust in November 2010 which was then lent to Mr Currell and concluded that the loan represented taxable earnings. They issued two determinations in March 2015 – one under Regulation 80 Income Tax (Pay as You Earn) Regulations 2003 for £320,000 and another under s8 Social Security Contributions (Transfer of Functions, etc.) Act 1999 for £113,427.33.

When the company appealed to the First Tier Tribunal (FTT) the court concluded that they agreed with HMRC’s view and the payment was a reward.  

Mr Currell had written to the Trustees of the EBT requesting a loan – the purpose of which was to purchase his wife’s shares in the business and that he was aware he would need to provide security, which he agreed to be his own shareholding in the company. The Trustee informed MC that his request was approved and on 25 November 2010 Mr Currell signed a loan agreement which provided for a full repayment within a five-year term, which would be interest free unless he was a “bad leaver”. Mr Currell was able to prove that he had enough funds in his account to repay the loan. 

Mr & Mrs Currell entered into a share sale agreement and the Trustee valued the shares at £800,000.  The EBT paid the loan funds to Mrs Currell, who then lent the money to the company on the proviso the money would be repaid whenever Mrs Currell requested it.

The FTT accepted that the Loan was a genuine loan and repayment agreement and also accepted that the funds weren’t repaid and re-issued to employees as bonuses because of a genuine concern about double taxation, given that HMRC had by this time opened their enquiry into the transactions to and from the EBT and issued assessments. Mr Currell repaid £50,000 in 2019.  

The company appealed to the UT on the one ground: “The Tribunal erred in law in concluding that the Payment constituted earnings in the amount of £800,000 under s62(2)(b). In particular, the FTT has erred in law in holding that the principal of the loan constituted a reward or benefit within the meaning of s62(2)(b)”.

The approach of the UT

The UT noted that the FTT was heavily reliant on the Supreme Court decision in Rangers (RFC 2012 plc (in liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45), stating at paragraph 14 of that decision: "The main issue for determination in this appeal, therefore, is whether the sole or a substantial reason why the Payment was paid by the company to the EBT as part of the arrangements was because it was a reward or benefit for MC for his exertions as an employee/director of the company.” And at paragraph 24 that they intended to take a purposive approach: “We start therefore by looking at the reasons why the company made the Payment, and then move on to consider the reasons why the EBT made the Loan to MC.”

The FTT stated that the whole scenario was “prewired” and at paragraph 31: “The Appellant required…£800,000 of working capital in its business and it was inevitable that it would find its way back into the Appellant once it had been paid to the EBT. 

At paragraph 52, the FTT went on to opine that: "The only reason for the Trustee exercising its discretion to provide the Loan of £800,000 to MC was because of the work which MC had done over the years…” and at paragraph 56: "We have found that it was inevitable, at the time at which the Payment was made by the company to the EBT, that it would be paid by the Trustee to MC by way of the Loan. We have also found that it was more likely than not that the Loan was paid to MC as a reward for the services which he had provided to the company.” 

The UT decided that the FTT had been too eager to classify the Payment into the EBT as earnings and that “most” loans were benefits in kind, in reality.  They had been swayed by this opinion rather than concentrating on the facts. Other cases such as Murray Group Holdings Ltd v HMRC [2012] UKFTT 692 (TC) could have provided assistance on this.

Conclusion

The Upper Tribunal disagreed and concluded that the FTT had erred in law when they decided that a loan gives rise to a taxable benefit and making the loan confirmed that a taxable benefit had arisen, so they set aside that decision. The decision was re-made, and the appeal was allowed, the UT having concluded that neither the payment into the EBT, nor the loan, were earnings under ITEPA 2003.

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