12 November 2018


The issue in this case was whether an inter-company loan advanced by Wildbird Foods Limited (Wildbird) to Birdforum Limited (BFL) constituted a loan relationship for the purposes of Part 5 of the CTA 2009.

BFL was looking to expand. Accordingly, Wildbird invested £100,000 in BFL's share capital on the assumption that BFL was likely to need further investment in addition to this initial £100,000. Such additional investment was to be provided to BFL in the form of an investor's loan. The terms of the 'loan' were that it shall be repayable on demand and interest would accrue on the debt.

By 2015 BFL owed £1.5 million and no interest had ever been paid by BFL on that debt. In each of Wildbird's corporation tax returns Wildbird claimed a non-trading loan relationship debit equal to the amount of loan advanced during the year to BFL. This was on the basis that the loan was unlikely to be recoverable from BFL in the short term.

HMRC opened inquiries into Wildbird’s return and ultimately amended the returns to add back in the loan relationship debts referred to above.


Wildbird sought to argue that the loan advances fell within the loan relationship rules in Part 5 of the CTA 2009. Wildbird argued that the evidence made it clear that the loan advances were money debts and the advances of money were made with corresponding obligations to repay.

HMRC argued that the arrangements between Wildbird and BFL did not amount to a loan relationship on the basis that the conditions in subsections 302(1)(a) and (b) of the CTA 2009 had not been satisfied. This was on the grounds that there was no 'money debt' between Wildbird and BFL since the loan did not bear the charaterisitcs of a loan; i.e. that it is repayable, it carries interest and is an ordinary business transaction.

HMRC sought to rely on the principle in Smart v Lincolnshire Sugar Limited which provided authority that before a contingently repayable amount could be regarded as a debt it had to have 'the hallmarks of a loan'. The hallmarks include things such as: 'it being evidenced by a debt instrument; carrying interest; ranking above share capital in a liquidation; and so on.'

On this basis HMRC sought to show that:

  1. Interest had never been charged or paid on the advances that had been made by Wildbird to BFL.
  2. BFL had not made a profit and so did not have capacity to repay the advances.
  3. The annual advances and immediate write-offs in Wildbird’s accounts were clear evidence that there was not a true loan relationship.

The decision

The First-tier tribunal held that the amount payable by BFL to Wildbird in respect of each advance amounted to a 'money debt' for the purposes of section 303 CTA 2009. Further, the condition in subsection 302(1)(a) CTA 2009 was clearly satisfied as Wildbird stood in the position of creditor in respect of a money debt owed by BFL.

The condition in subsection 302(1)(b) CTA 2009, whether the debt arises from a transaction for the lending of money, was the subject of a little more debate. It was held that the legal nature of the transactions between Wildbird and BFL clearly amounted to a 'transaction for the lending of money' subject to an analysis of the decision given in Smart.

On analysing the decision in Smart the Judge held that Smart related to very complex sugar subsidiary payments that did not need to be repaid unless the sugar grower went insolvent. This was held not be a loan. In the current matter however the Judge held he was not considering a subsidy but a loan that did have an obligation on it to repay the same. The fact Wildbird had never been repaid was irrelevant. The transaction in question was found to be a loan.

Key contact

Jim Aveline

Jim Aveline Partner

  • Private Client Services
  • Family Offices and Family Businesses
  • Food and Farming

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