His Majesty’s Revenue and Customs v MR Currell Lt

The company in this case operated a painting and decorating business. It was a family business. Mr and Mrs Currell both became directors, and their two sons also became involved. By November 2010 the shareholdings were approximately 31% each held by Mr and Mrs Currell, 5% held by each son, and 28% held in a share incentive plan. Mr Currell took very modest amounts by way of salary, but the company paid dividends to its shareholders.

An EBT was established in 2010 with an independent corporate trustee. The beneficiaries were described as the “bona fide employees” of the company and their relatives. The directors sent the trustee a copy of board minutes approving a contribution of £800,000 to the EBT and referring to the possibility that the trustee might use it to make loans on appropriate terms to employees or directors, and pay bonuses and provide other benefits. Mr Currell applied to the trustee for a loan of £800,000 to enable him to buy 261,437 A shares in the company. His request was approved, and Mr Currell entered into a loan agreement pursuant to which the trustee agreed to lend him £800,000 for a five-year term, secured by a charge on his interest in the A shares. The loan was to be interest free unless Mr Currell became a “bad leaver.” Mr Currell had the option of early repayment, but the trustee could not require repayment before the maturity date except in certain circumstances, which included Mr Currell’s insolvency or cessation of employment. The following day, Mrs Currell sold 261,437 A shares to her husband for £800,000, the shares having previously been valued at that amount by the trustee. Bank transfers reflected the payment, the loan and the share sale, but also a further transfer of £800,000 from Mrs Currrell to the company, which was treated as a loan from Mrs Currrell to the company.

HMRC sought tax on the basis that the loan amounted to a reward for Mr Currell’s services to the company so fell to be treated as remuneration.

The First Tier Tribunal agreed, taking the view that the payment was paid by the company as a reward for the services supplied by Mr Currell to the company so was earnings and thus taxable as asserted by HMRC. On appeal, the Upper Tribunal held that the payment did not constitute earnings within the meaning of s 62  Income Tax (Earnings and Pensions) Act 2003. It distinguished the case before it from the Supreme Court decision in  RFC 2012 plc (in liquidation) v Advocate General for Scotland on the basis that it had been common ground that the payments to the trust in that case comprised remuneration, whereas in this case it was contended the £800,000 paid had given rise to a genuine obligation to repay, so amounted to a loan.

HMRC appealed to the Court of Appeal which upheld the Upper Tribunal’s ruling, confirming that the payment had been a genuine loan with a repayment obligation as opposed to being remuneration for Mr Currell’s services. The effect is, it seems, that a payment made to an EBT which is then lent to an employee on a commercial basis is not taxable as earnings. The Court of Appeal again distinguished the decision of the Supreme Court in RFC 2012 plc, holding that advancing money by way of a loan did not generally amount to a payment of earnings: in this case the EBT had immediately on-lent the £800,000 in issue to Mr Currell, which Mr Currell had in turn applied as described above.

Falk LJ said,

“I do not exclude the possibility that, in some limited circumstances, the provision of a loan may amount to a payment of earnings in the amount of the principal of the loan. That would most obviously be in a case of sham or where it was otherwise never intended that the ‘loan’ should be repaid, such that the true agreement is not one of loan.”

But,

“[T]he Loan in this case was a genuine one. There was no finding that it was advanced on the understanding that it would not be required to be repaid. [Counsel for HMRC’s] submission that Mr Currell had practical control of whether repayment was required is not made out on the facts, and would in any event be insufficient as a matter of law. On the facts, the loan was made by the Trustee, an independent entity. Even if the Trustee had been entirely reactive to the Company (a finding that the FTT made only in relation to the award of employee bonuses […], Mr Currell did not have sole control of the Company. Further, there is in any event no authority for the proposition that the fact that the borrower controls the lender is sufficient to alter the legal character of a loan. It is not. I would add that, were it otherwise, the legal status of the entirely commonplace transaction of a loan to a parent company could be called into question.”

Although the loan-based proposition at the heart of the Court of Appeal’s decision in this case is of general significance that goes beyond the individual circumstances of the case, it nevertheless rests on a number of factual findings going to the nature of the transactions involving the trust, Mr Murrell and the company. It serves as a warning, however, that not all EBT schemes are susceptible of being impugned on the basis that they necessarily give rise to disguised remuneration.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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