UT allows company's appeal as payment to EBT was not earnings of its employee

In M R Currell Ltd v HMRC [2024] UKUT 00404, the Upper Tribunal (UT) held that a contribution from the company to an employee benefit trust (EBT), which then made a loan to a director of the company, did not constitute earnings.

Background

M R Currell Ltd (MRCL), a painting and decorating company, established an EBT in 2010 to facilitate employee incentive arrangements. MRCL then made an £800,000 contribution to the EBT (the Contribution).  

The EBT subsequently loaned that amount to Mr Mark Currell, a director and shareholder of MRCL. This interest free loan was repayable on its fifth anniversary and secured against shares in MRCL. Mr Currell purchased these shares, from his wife Mrs Currell, using the loan funds. Mrs Currell paid the £800,000 to MRCL and treated this as a loan which could be repaid to her when she wished.

HMRC was of the view that the Contribution was taxable earnings and issued to MRCL: 

(1)  a determination under regulation 80, Income Tax (Pay as You Earn) Regulations 2003, in the sum of £320,000; and 

(2) a decision under section 8, Social Security Contributions (Transfer of Functions, etc) Act 1999, in the sum of £113,427.33  

(the Determinations)

MRCL appealed the Determinations to the First-tier Tribunal (FTT). 

FTT decision 

The appeal was dismissed.

HMRC contended that the Contribution constituted taxable earnings under section 62, Income Tax (Earnings and Pensions) Act 2003.

The FTT agreed, and confirmed that the Contribution constituted earnings of Mr Currell which were subject to income tax and National Insurance contributions. In its view, the payment from MRCL to the EBT was a reward, or benefit, to Mr Currell, in return for his services, and the "prewired" arrangements enabled Mr Currell to divert his income via the EBT. 

MRCL appealed to the UT. 

UT decision

The appeal was allowed.

The FTT concluded that the transactions did not give rise to taxable earnings and set aside the FTT's decision. It held that the mere existence of a link or connection between the contribution by MRCL to the EBT and Mr Currell's status as a director of MRCL, was not sufficient for the payment to constitute his earnings. In its view, the FTT had failed to take account of the character of what Mr Currell received as a director i.e. a loan with a resulting obligation to repay that loan. In the view of the UT, the facts of this case were distinguishable from those in RFC 2012 plc (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (Rangers), because in that case the parties had specifically agreed that payments into the relevant trusts constituted earnings. Conversely, in the present case, the loan from the EBT to Mr Currell was genuine, with a clear obligation for it to be repaid.

Moreover, the UT said that the FTT had erred in law in holding that a loan will "in the vast majority of cases" provide a "benefit" to the borrower, for employment tax purposes. In the view of the UT, Parliament could not have intended to treat repayable loans as earnings in such way.  

Comment 

This is a significant decision and confirms that not all contributions made by a company to an EBT, which are subsequently used to make a loan to a director of the company, will constitute earnings. Genuine loans from such trusts, with clear repayment obligations, do not automatically constitute taxable earnings. There has been a propensity on the part of HMRC to rely on Rangers when challenging EBT arrangements. This decision confirms (what has always been the case) that Rangers does not mean that all loans made by an EBT constitute earnings. Each individual case must be determined on its own particular facts when considering that question.

The decision can be viewed here.