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Spritebeam and others v HMRC

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In Spritebeam and others v HMRC [2015] UKUT 75 (25 February), the UT found that a tax avoidance scheme failed as one of the parties was taxable under Sch D Case VI.

These appeals were lead cases relating to a corporation tax avoidance scheme. One company in a group (the lender) lent money to another group company under a loan agreement. This was on terms that although the capital was repayable to the lender, no interest was payable while the loan was outstanding, but instead irredeemable preference shares (equal in value to a commercial rate of interest on the loan) were to be issued to a different group company (the share recipient). Both the lender and the share recipient contended that they were not liable to tax on the interest (or its equivalent).

The UT considered that ICTA 1988 s 786(1) is worded as it is in order to catch any arrangement for the lending of money, however that arrangement may be constructed. It therefore rejected contentions that the application of s 786 required the existence of both a loan and a separate transaction, and that the scope of s 786 should be restricted by the mischief at which it was aimed. The UT found, however, that the value of the shares did not amount to income of the Lender because of the operation of FA 1996 s 84. Under accounting rules, the value of the shares did not amount to income of the lender.

The last issue was whether the share recipient was receiving income taxable under Schedule D Case VI. The UT observed that the source of the share recipient’s income was the loan agreement, in which it was the named beneficiary, even if it did not have the capacity to enforce that entitlement itself. The appeal was therefore dismissed on the Case VI issue.

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Why it matters: The scheme had been widely implemented, so this decision will come as a disappointment to many. The key finding of the UT, which may be appealed, was that a payment can represent income even though its recipient cannot enforce it.