Background
Nicholas Powell was a director and participator in Thermoline Ltd, a close company. Thermoline had advanced him funds through his director’s loan account, which stood at £512,713.89 on 31 December 2020. The company was liable to the section 455 Corporation Tax Act 2010 charge in respect of the advances.
Under a deed executed in March 2021 but effective from 31 December 2020, Thermoline released Mr Powell from his debt and transferred its rights and obligations under the loan to its holding company, Property Holding SW Ltd (PHSW). PHSW became Mr Powell’s creditor and agreed to owe Thermoline the same amount through an inter-company loan account. HMRC issued a closure notice treating the release as dividend income under section 415 ITTOIA 2005, producing an additional 2020/21 income-tax liability of £194,580.60. The First-tier Tribunal dismissed Mr Powell’s appeal.
The Court’s Holding
The Upper Tribunal dismissed Mr Powell’s appeal. Applying the binding Court of Appeal authority in Collins v Addies, it held that the arrangements released Mr Powell’s debt to Thermoline for section 415 purposes. A release is not excluded merely because it is supported by full or valuable consideration.
The Tribunal held that the relevant exception is for repayment or satisfaction that enables the company to recover its money, including payment by a third party or acceptance of equivalent value in kind. It does not extend to a novation in which one debt is released and another obligation to pay is substituted. The fact that this case involved a change of creditor, rather than the substituted debtor in Collins, did not alter the analysis: Thermoline released Mr Powell’s debt without repayment, while PHSW’s inter-company debt was a replacement obligation.
Key Takeaways
- A close-company participator’s debt may be “released” for section 415 even where the release is given for valuable consideration.
- A novation replacing a participator’s debt with another debt is not repayment or satisfaction merely because the replacement debt has the same value.
- The statutory question turns on the release of the participator’s legal obligation and whether the company recovered its money, not on whether the participator obtained an economic benefit overall.
Why It Matters
The decision confirms the continuing force of Collins v Addies in applying section 415 to restructurings of director or participator loan accounts. Group-company arrangements that move a loan from one creditor to another can trigger a deemed-dividend tax charge where the original close company releases the participator.
For advisers, the case draws a sharp distinction between actual repayment or satisfaction and a contractual substitution of debt. Matching inter-company balances and continued liability to another group company will not, without more, prevent the section 415 charge.