The facts were simple enough. Mr and Mrs England ([2023] UKFTT 313 (TC), as reported in Tax Journal, 14 April 2023) had borrowed money from their company through having overdrawn directors’ loan accounts. The company became insolvent and the liquidator, apparently recognising the impossibility of recovering the full amount of the debt, did a deal. She agreed that if Mr and Mrs England coughed up £100,000 over an agreed payment schedule, the remainder of the debt owed (some £900,000) would be released. But if they didn’t keep to their side of the bargain, the whole debt would be collected. And meanwhile there would be a legal charge in place securing the whole debt.
It wasn’t in dispute that there was a charge to tax on the amount released. The question was when the charge arose: when the agreement was entered into in October 2013, or when the condition as to meeting the repayment schedule was met, two years later?
Counsel for the Englands put forward some very cogent arguments why the charge could not logically arise until 2015. Most obviously, that if for whatever reason the Englands did not keep to the repayment schedule, the full amount of the debt would become repayable. Since there would, if that happened, be no machinery for adjusting the tax charged on the amount ‘released’ but subsequently ‘unreleased’, the result would be that the Englands would have paid tax on £900,000 of value which they hadn’t actually received.
HMRC asserted that: ‘The release or write off occurred triggering a tax charge under [ITTOIA 2005] s 415 at the point the settlement agreement was executed and at that point the full liability ceased to be due or payable with immediate effect. The release or write off of the debt therefore occurred in 2013/14, irrespective of when the final payment was made.’
It’s difficult to see how that squared with the facts, particularly the analysis that ‘the full liability ceased to be due or payable with immediate effect’. Suspended, yes, but released? Hardly. Nonetheless, the First-tier Tribunal (FTT) accepted HMRC’s analysis. We doubt if the Upper Tribunal will.
How could this outcome have been avoided? It appears that HMRC and the FTT was influenced (not to say misled) by the wording of the agreement that ‘This agreement is in full and final settlement of the Liability’ – phrasing which gives a superficial impression of finality when in reality the release was only provisional.
If the agreement had been worded differently – ‘The liquidator agrees to suspend collection of all but £100,000 of the debt for two years and will write off the balance in two years’ time if the agreed payments have been made’ – might the case never have reached the FTT? We like to think so.
The facts were simple enough. Mr and Mrs England ([2023] UKFTT 313 (TC), as reported in Tax Journal, 14 April 2023) had borrowed money from their company through having overdrawn directors’ loan accounts. The company became insolvent and the liquidator, apparently recognising the impossibility of recovering the full amount of the debt, did a deal. She agreed that if Mr and Mrs England coughed up £100,000 over an agreed payment schedule, the remainder of the debt owed (some £900,000) would be released. But if they didn’t keep to their side of the bargain, the whole debt would be collected. And meanwhile there would be a legal charge in place securing the whole debt.
It wasn’t in dispute that there was a charge to tax on the amount released. The question was when the charge arose: when the agreement was entered into in October 2013, or when the condition as to meeting the repayment schedule was met, two years later?
Counsel for the Englands put forward some very cogent arguments why the charge could not logically arise until 2015. Most obviously, that if for whatever reason the Englands did not keep to the repayment schedule, the full amount of the debt would become repayable. Since there would, if that happened, be no machinery for adjusting the tax charged on the amount ‘released’ but subsequently ‘unreleased’, the result would be that the Englands would have paid tax on £900,000 of value which they hadn’t actually received.
HMRC asserted that: ‘The release or write off occurred triggering a tax charge under [ITTOIA 2005] s 415 at the point the settlement agreement was executed and at that point the full liability ceased to be due or payable with immediate effect. The release or write off of the debt therefore occurred in 2013/14, irrespective of when the final payment was made.’
It’s difficult to see how that squared with the facts, particularly the analysis that ‘the full liability ceased to be due or payable with immediate effect’. Suspended, yes, but released? Hardly. Nonetheless, the First-tier Tribunal (FTT) accepted HMRC’s analysis. We doubt if the Upper Tribunal will.
How could this outcome have been avoided? It appears that HMRC and the FTT was influenced (not to say misled) by the wording of the agreement that ‘This agreement is in full and final settlement of the Liability’ – phrasing which gives a superficial impression of finality when in reality the release was only provisional.
If the agreement had been worded differently – ‘The liquidator agrees to suspend collection of all but £100,000 of the debt for two years and will write off the balance in two years’ time if the agreed payments have been made’ – might the case never have reached the FTT? We like to think so.
