The issue of releasing loans was also considered a few months ago in the case of Powell v HMRC [2025] UKFTT 528 (TC). A company, Thermoline Ltd, made a loan to a participator of about £500,000 which gave rise to a s 455 charge and this loan was subsequently novated to another company.
Section 458 provides that the tax is refunded if the loan is repaid to the company, or if the loan is released or written off.
The Court of Appeal in Collins v Addies [1992] STC 746 made it clear that the novation of a loan is not an assignment of the loan; it is the release of one loan and the creation of another. So Mr Powell no longer owed Thermoline anything. He owed the other company £500,000 and they owed £500,000 to Thermoline. Accordingly,
the tax was refunded to Thermoline.
However, when a company is charged to tax under s 455 and the loan is released or written off, ITTOIA 2005 s 415 imposes a charge to income tax on the participator on the amount released or written off.
It may be thought that a loan is released when it is actually paid off, but in Collins v Addies it was explained that:
‘“release” does not include any transaction which either consists of or amounts to a repayment of the loan, even if the transaction, when viewed in isolation, might be said to have the effect of releasing the debtor from his obligation to repay the loan. The reason for that limitation is that the repayment of the loan, or the acceptance by the company of something equivalent to it, effectively enables it to recover its money, in which event there is no justification for imposing a liability to tax on the participator.’
Mr Powell argued that the effect of the novation was that his loan to Thermoline was released for full consideration – because the other company had agreed to satisfy the debt – so there was no release and therefore no income tax charge. Sorry, said the tribunal; the debt due from Mr Powell had simply been substituted by a loan from the other company, it had not been discharged at all.
(It is not clear – at least to me – how this works. If the new company had simply paid off the loan on behalf of Mr Powell, that would not have given rise to any liability under s 415. So why should it be any different if they had undertaken to repay it later? Why did it not simply mean that a s 455 liability arose on the new company – and everybody would be back to square one.)
Anyway, leaving that aside, the problem here is that Mr Powell was charged to income tax on the release of his loan by reason of the novation, but he still owed the money to the new company who had assumed the obligation to pay the outstanding amount. So he was still liable to repay the amount of the loan to the new company – and he had to pay income tax on the £500,000 as if his obligation no longer existed.
This is a consequence which had been highlighted in Collins v Addies as an anomaly – a pretty serious anomaly – but apparently not enough of one to make any difference.
It would be interesting to consider the position had the loan been assigned by Thermoline to the other company for full consideration. In that case, the analysis would have been completely different – but that better be a subject for another day.
The issue of releasing loans was also considered a few months ago in the case of Powell v HMRC [2025] UKFTT 528 (TC). A company, Thermoline Ltd, made a loan to a participator of about £500,000 which gave rise to a s 455 charge and this loan was subsequently novated to another company.
Section 458 provides that the tax is refunded if the loan is repaid to the company, or if the loan is released or written off.
The Court of Appeal in Collins v Addies [1992] STC 746 made it clear that the novation of a loan is not an assignment of the loan; it is the release of one loan and the creation of another. So Mr Powell no longer owed Thermoline anything. He owed the other company £500,000 and they owed £500,000 to Thermoline. Accordingly,
the tax was refunded to Thermoline.
However, when a company is charged to tax under s 455 and the loan is released or written off, ITTOIA 2005 s 415 imposes a charge to income tax on the participator on the amount released or written off.
It may be thought that a loan is released when it is actually paid off, but in Collins v Addies it was explained that:
‘“release” does not include any transaction which either consists of or amounts to a repayment of the loan, even if the transaction, when viewed in isolation, might be said to have the effect of releasing the debtor from his obligation to repay the loan. The reason for that limitation is that the repayment of the loan, or the acceptance by the company of something equivalent to it, effectively enables it to recover its money, in which event there is no justification for imposing a liability to tax on the participator.’
Mr Powell argued that the effect of the novation was that his loan to Thermoline was released for full consideration – because the other company had agreed to satisfy the debt – so there was no release and therefore no income tax charge. Sorry, said the tribunal; the debt due from Mr Powell had simply been substituted by a loan from the other company, it had not been discharged at all.
(It is not clear – at least to me – how this works. If the new company had simply paid off the loan on behalf of Mr Powell, that would not have given rise to any liability under s 415. So why should it be any different if they had undertaken to repay it later? Why did it not simply mean that a s 455 liability arose on the new company – and everybody would be back to square one.)
Anyway, leaving that aside, the problem here is that Mr Powell was charged to income tax on the release of his loan by reason of the novation, but he still owed the money to the new company who had assumed the obligation to pay the outstanding amount. So he was still liable to repay the amount of the loan to the new company – and he had to pay income tax on the £500,000 as if his obligation no longer existed.
This is a consequence which had been highlighted in Collins v Addies as an anomaly – a pretty serious anomaly – but apparently not enough of one to make any difference.
It would be interesting to consider the position had the loan been assigned by Thermoline to the other company for full consideration. In that case, the analysis would have been completely different – but that better be a subject for another day.
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