Shinelock: loan relationships and late claims

Although the basic facts in Shinelock Ltd v HMRC [2021] UKFTT 320 (TC) were not very complicated and the amount of tax at stake was modest, the case raises questions both of technical and of procedural interest.

Possibly the most notable point is the finding that HMRC may, in some circumstances, be regarded as having agreed to extend the time limit for making a claim without having intended to do so or indeed without having knowingly considered the matter at all.

The facts of the case

Shinelock, a company owned by Mr Ahmed, bought a property in 2009 for £725,000. The purchase was financed partly by bank loan and partly by amounts paid by Mr Ahmed. Some five years later Shinelock sold the property for £1,030,000 and soon afterwards it made to Mr Ahmed a payment of £305,000 (i.e. the difference between the purchase and sale price) (‘the payment’). This was said to have been made pursuant to an agreement that the amount of any capital gain would be paid to Mr Ahmed ‘in return for financing or guarantees provided by’ him. Chief among the difficulties with that proposition (aside from the agreement being only an oral one between Mr Ahmed and his own company) were that Mr Ahmed did not in fact provide any personal guarantee for the bank loan, and that the economic gain made by the company (after taking account of costs of purchase and sale) was not £305,000 but £260,178.

No gain was disclosed in Shinelock’s corporation tax computations. When HMRC enquired into the return, Shinelock initially explained that it had held only bare legal title: the property was beneficially owned by Mr Ahmed and any gain had been made by him (and as a non-resident he was not liable to CGT under the law as it then stood).

By the time the case came before the First-tier Tribunal (FTT), Shinelock had accepted that it was the beneficial owner: the company now claimed that the payment was deductible as a non-trading loan relationship deficit (NTLRD) – the loan relationship in question being either with the bank or with Mr Ahmed.

HMRC put forward two arguments on the technical issue. The first was that the payment was a distribution as defined by CTA 2010 s 1000(1) (and therefore disqualified by CTA 2009 s 465 from being taken into account under the loan relationship code). The second was that in any event the payment was not a loss or expense within CTA 2009 s 307(3) (as it then stood) in relation to either the bank loan or any loan relationship with Mr Ahmed.

The loan relationship issues

The FTT considered that the fatal flaw with HMRC’s argument on the distribution point was that HMRC had accepted as part of the statement of agreed facts the existence of a ‘contract stating that the Appellant had to pay any capital gain to [Mr Ahmed]’. The FTT considered that a payment made by a company to discharge a contractual obligation could not be said to be made ‘out of the assets’ of the company and therefore could not fall within any of the paragraphs of CTA 2010 s 1000(1) relied upon by HMRC.

Although that disposed of the ‘distributions’ point, the FTT considered what the position would have been if the payment had been made ‘out of the assets’ of the company. Two conclusions of the FTT are of particular note.

The first is that the fact that Mr Ahmed was not a shareholder in Shinelock at the time at which the payment was made (the shares having meanwhile been temporarily transferred to a Mr Sadiq for reasons that had nothing to do with tax) would not have prevented the payment from being a distribution ‘in respect of shares’ under CTA 2010 s 1000(1) para B.

The second is to do with whether the payment would have been, under para C, consideration that ‘depends (to any extent) on the results of (a) the company’s business or (b) any part of the company’s business’. The FTT did not consider that a payment the amount of which was determined by the gain on disposal of a single asset met that criterion.

On the question whether the payment (although not a distribution) was a NTLRD, the FTT found in favour of HMRC.

First, examination of the accounts revealed that a debit for the payment did not appear as such in the company’s profit and loss account. The taxpayer’s response was that the apparent absence of any entry was explained by the netting of the gain against the payment, as was said to be permitted under FRS 102. The FTT accepted that if an entry of £0 in the accounts represented the netting-off of two or more gross figures, then each of those gross figures could properly be regarded as having been recognised in determining the profit. But it considered that if there is no entry at all (as was the case for Shinelock), the underlying gross amounts cannot be said to have been recognised.

The FTT had in any event difficulty in seeing how netting off a gain of £260,178 against a payment of £305,000 could arrive at nil (as well it might) and concluded that the payment had not as a matter of fact been recognised in Shinelock’s accounts in determining the company’s profit or loss for the period in question. It could therefore not be or contribute to a NTLRD.

That was of itself enough for HMRC to win the case, but the FTT went on to consider whether the payment could have been a NTLRD if it had been recognised in the accounts.

The FTT observed that to be a NTLRD the payment would need (by CTA 2009 s 307(3)) to ‘fairly represent’ either a loss that arose to Shinelock from its loan relationships or an expense incurred under or for the purposes of those relationships. Looking in turn at the bank loan and the loan from Mr Ahmed, the FTT concluded that in each case the connection with the loan in question was too remote or indirect: ‘It was a consequence of the wider arrangement between the parties.’

Procedural matters

But the technical issues were only part of the interest of the case. There were procedural ones too. Given the decision on the technical issues, the decision on the procedural ones was irrelevant to the outcome of the case: but they are worth examining in some detail.

Following the company’s acceptance that it was the beneficial owner of the property, HMRC issued a closure notice in May 2018 assessing a capital gain of £94,270 (the difference between that and the economic gain being apparently due to indexation allowance).

In June 2018, the company appealed against the closure notice, raising for the first time the question of relief for the alleged NTLRD of £305,000 and providing a computation which set £94,270 of it against the gain and carried the balance forward. HMRC’s offer of a review was accepted and the ‘review of the matter’ letter preceding the review responded to the argument put as to the NTLRD.

Before the FTT, HMRC contended (separately from the substantive technical points) that the FTT had no jurisdiction to consider the loan relationship point, for two reasons.

The first was that since no claim had been made before the closure notice was issued, the claim was not one of the ‘matters’ that had been the subject of the decision contained in the closure notice. It therefore followed that the claim to relief for the NTLRD was not one of the ‘matters in question’ on the appeal. As such, TMA 1970 s 49G(4) precluded its being considered by the FTT on appeal.

On that first point, the FTT concluded that the closure notice, although not referring in terms to a NTLRD, did set out a ‘clear conclusion by HMRC that there were no reliefs or losses of any description available to offset the chargeable gain’, and that the ‘view of the matter’ letter did address the NTLRD question. That question was thus squarely within the ‘matters in question’ and within the FTT’s jurisdiction.

HMRC’s second procedural point was that no claim to the relief was made within the time limit of two years from the end of the accounting period in question, and no late claim had been admitted (and, of course, no appeal lies to the FTT against HMRC’s refusal to accept a late claim).

On that second point, the FTT, noting that there are no particular formalities required for the making of a claim, thought it clear that the appeal in June 2018 incorporated a claim. The fact that the claim was on the basis that the relevant loan relationship was between Shinelock and the bank rather than Shinelock and Mr Ahmed did not matter. There had certainly been a claim.

HMRC’s inadvertent time limit extension

Equally certainly, the claim was late. The question remained whether HMRC had allowed the late claim.

HMRC said it had not. Prima facie, one might have thought that that was an end to it: HMRC must be assumed to know what it had done. But the FTT thought otherwise.

The FTT’s view was that, although HMRC had not admitted the claim in the sense of agreeing that the relief was due, it had by its actions ‘allowed the claim to be made … in circumstances where HMRC did not make a deliberate decision to this effect’.

This was on the basis that HMRC addressed the substantive argument both in the letter offering a review and in the review letter itself:

‘HMRC were maintaining a position that there was no NTLRD. There was no mention of the need to claim such a deficit to use it in the current year, the time limit or that no mention had been made by Shinelock of the use of such a deficit until after the expiry of the two-year period set out in s 460(1)(a). Significantly, there was no rejection of the claim on the express basis that it was made late.’

Indeed, HMRC admitted that it had identified the time limit issue only when preparing the skeleton argument for the hearing in January 2021.

Thus HMRC had, by its actions, inadvertently allowed the claim to be made late.

As a decision of the FTT, Shinelock has no authority as precedent, and it may be reversed on appeal. But it is nonetheless potentially helpful. On the basis of this case, it is not necessary for HMRC to say the words ‘we extend the time limit’ for a claim: it may therefore be possible in future ‘late claim’ cases to argue that HMRC has inadvertently extended the time limit simply by addressing the substance of the claim.

Estopped by convention?

There is more. For good measure, the FTT considered whether the recent Supreme Court decision in Tinkler v HMRC [2021] UKSC 39 should be considered in regard to the question whether HMRC were estopped from denying that a late claim had been allowed. This was a case in which HMRC successfully argued that the taxpayer was estopped, under estoppel by convention, from denying that a valid enquiry under TMA1970 s 9A had been opened.

Here, however, the FTT may have mis-fired, perhaps forgetting that as long ago as 1934 the High Court observed (in Williams v Grundy’s Executors (1931-1934) 18 TC 271) that ‘nothing is better settled than the principle that there is no estoppel as against the Crown’. Rather, this kind of argument would have to rely upon the doctrine of ‘legitimate expectation’ and judicial review – matters on which the FTT has no jurisdiction.

It is slightly ironic, perhaps, that a case that raised such a wide range of issues should ultimately have been decided mainly on the question whether the accounts included an entry in the profit and loss account of £0 or no entry at all. But such is the way of tax law.