HMRC have now made nearly two dozen referrals to the advisory panel (‘the Panel’) established under the General Anti-Abuse Rules (‘the GAAR’).
Until recently, the Panel had on every occasion agreed with HMRC that the entering into and carrying out of the arrangements in question was not ‘a reasonable course of action in relation to the relevant tax provisions’, with the result that the arrangements were susceptible to counteraction under the GAAR.
The case that has broken HMRC’s winning streak is about loans to participators. And, in contrast to many of the referrals considered by the Panel, the facts are readily comprehensible.
The parent company of a group had made a loan to the main shareholder. The company was bound to pay tax under the ‘loan to participator’ rules unless the loan was repaid within nine months of the end of the accounting year.
Shortly before the crucial date, the shareholder repaid the loan. What irked HMRC was that he did so only by dint of borrowing from another company within the same group as the lender.
The shareholder’s advisers conceded that the purpose of the second loan was to avoid the charge to tax that would otherwise have arisen. But they pointed out that if the second loan had been taken from a bank, that would have been inoffensive enough. If borrowing to repay a loan in order to avoid a tax charge is legitimate, how can the source of the new loan make a difference?
Three factors seem to have tipped the Panel’s view in favour of the taxpayer:
- The new loan was itself potentially within the ‘loan to participator’ charge unless repaid within the permitted nine months after the year-end: so although one charge to tax was eliminated, a later one was (potentially) substituted for it.
- There were no ‘contrived or abnormal steps’ involved: simply, a second loan had been taken in order to repay the first.
- The failure of the anti-avoidance legislation to cover ‘group loans’ of this kind was ‘a big and obvious matter and it does not seem to [the Panel] that the GAAR can be used to cover such a gap.’
Some caveats:
The Panel found no evidence that the use of a second loan to repay the first formed ‘part of wider arrangements’ (despite that the fact that the second loan was itself subsequently repaid using a fresh loan from the parent). If there had been evidence of repeated ‘teeming and lading’ of loans the outcome is likely to have been different. That might perhaps have been the case if it had been clear from the outset that the parent company loan was to be repaid only by a loan from the subsidiary.
And remember that HMRC can sometimes seem to be the kind of bad losers that make Mr Trump seem a paradigm of reasonableness. The Panel’s opinion will be regarded by HMRC as pointing to a loophole for the closing of which we suspect legislation is even now being drafted.
Nonetheless, it is undoubtedly refreshing to know that the Panel can on occasion flex its muscles and will not always find in HMRC’s favour.
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