The question whether the terms of debt finance are such as to create a ‘special security’ and a distribution is often a live issue, particularly but not uniquely in the context of overseas financing of UK property investment. The recent Upper Tribunal decision in Shinelock [2023] UKUT 107 (TCC) throws some light in this area.
Shinelock Ltd had agreed with its owner Mr Ahmed that, in return for Mr Ahmed’s providing certain financing or guarantees in connection with its purchase of a property, it would account to him for any capital gain it might make on selling the property.
Shinelock sold the property, made a gain, paid an amount to Mr Ahmed and sought tax relief for the payment under the loan relationship rules.
HMRC resisted the deduction on a number of grounds, one of which was that the payment was a ‘distribution’. Distributions are never deductible in computing profit: in particular they can’t qualify for relief under the loan relationship rules.
The First-tier Tribunal (‘FTT’) held that the payment wasn’t a distribution; but that it wasn’t deductible under the loan relationship rules for other reasons. We commented in some detail on the case in 2021 here.
Although the outcome on appeal to the Upper Tribunal was the same (Shinelock didn’t get its tax relief), it was for a different reason – one which is of wider interest.
Among many other things, ‘distribution’ is defined to include a payment which is made out of the assets of the company ‘in respect of securities which are special securities’. Thus the main question to which the Upper Tribunal addressed itself was whether the ‘security’ in question (which term is defined to include any loan whether or not secured) was ‘special’. In particular, was it a security to which ‘Condition C’ applied – was it the case that ‘the consideration given by the company for the use of the principal secured depends (to any extent) on the results of—(a) the company’s business, or (b) any part of the company’s business’?
The FTT had said no: a payment the amount of which was determined by the gain on the disposal of a single asset did not meet that criterion. The Upper Tribunal disagreed:
‘Condition C is widely framed in a number of important respects. It applies to a company’s business, which is a wider concept than trade. It applies to any part of that business. The words “results of” are wider than profits, and encompass both income and capital items. Finally, it applies where the consideration depends “to any extent” on those results.
The FTT failed to take into account the breadth of the provision. The facts that the Property had been owned by Shinelock for several years, and that the disposal was “one-off”, which were relied on by the FTT, were not sufficient to prevent Condition C from applying. The results of an isolated disposal of “a single asset” held for several years are not outside the scope of “the results” of the business. Where, as here, it was not in issue that the Payment depended on the gain resulting from the disposal of the asset, Condition C would only fail to bite if the disposal was not part of Shinelock’s business.’
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