Lucky Mr Torkington!
01 October 2010
ITA07 s392 to s395 provide that an individual is entitled to deduct interest costs on a loan for acquiring ordinary shares of or lending money to (used wholly and exclusively for the business of) a close company, subject to certain conditions. The legislation derives from ICTA88 s360 and s360A.
HMRC has recently lost a case concerning whether the loan was used wholly and exclusively for the purposes of company business, relating to a claim in a tax return for the year ended 5 April 2005. HMRC had contended that ‘business’ in this context meant ‘trade’ and that as the business of the company was not one of lending money, then the claim failed. They also contended that as the money was on-lent by the close company to a non-close company (a company which was non-UK resident), the lending of the money did not satisfy the requirements of what is now ITA07 s392(2)(b)(ii) as it had to be used for the purpose of the business of any associated company of the close company, which is also a close company and not a close investment holding company. Associated company refers now to the CTA10 s449 definition of companies that at the particular time, or at any other time within the last 12 months, was under the control of the same person or persons, or where one controls the other.
The background is that Mr Torkington owned 50% of a UK company (Openshield) with a 100% UK subsidiary (Weatherwise (UK) Ltd – WUK Ltd). Mr Mclean owned the remaining 50% of Openshield.
Mr Torkington and Mr Mclean also each owned 50% of Weatherwise Guarantee Company which wholly owned a group of Canadian subsidiaries, one of which was Weatherwise Aviation Inc (WA Inc).
A C$3m loan was required to finance the development by WA Inc of hangar and maintenance facilities at Lake Simcoe Regional Airport. WA Inc was unable to raise funds from Canadian lenders and WUK Ltd investigated the possibility of obtaining finance from UK lenders. Eventually one was found, but the lender was unwilling to lend to the company for overseas development. The commercial problem was resolved by Mr Torkington taking on the loan from the UK lender, conditional on a personal guarantee. Mr Torkington lent the money to WUK Ltd on identical terms to those he had obtained; WUK Ltd on lent the money to WA Inc for a 3% interest margin.
The advantage of the WA Inc project going ahead to WUK Ltd was the opportunity for substantial design and drawing fees. The loan was routed through WUK Ltd as the project was WUK Ltd’s and there was a desire to share risk with the other effective investor Mr Mclean. WUK Ltd had undertaken a number of major projects internationally, including in the UK and also in Canada, during the period since 1980.
The Tribunal concluded that the term ‘business’ should not be interpreted narrowly to mean ‘trade’ and that WUK Ltd did undertake business activities. They also concluded that the loan was required so that WUK Ltd could earn substantial design fees which were part of its business, and that therefore the conditions for the giving tax relief to Mr Torkington for loan interest costs were met.
The decision was released on 17 September under appeal number TC/2009/15024, but has not yet appeared on the First Tier Tax Tribunal website.