It is important to ensure you fully understand the rules of any tax reliefs claimed and take advice if necessary. Recently, the Upper Tribunal (UT) dismissed an entrepreneur's appeal against a decision that the provision of a Director's Loan Account (DLA) from his company was an 'extraction of value', meaning that Business Investment Relief (BIR) ceased to apply on his investment in it.
The entrepreneur was resident but not domiciled in the UK and was taxed on the remittance basis. In December 2016 he incorporated a company in the UK, of which he was the sole shareholder and initially the sole director, and invested £1.5 million of his foreign income in it. He successfully claimed BIR on the investment under Section 809VA of the Income Tax Act 2007, with the result that the amount invested was treated as not remitted to the UK and therefore not subject to Income Tax.
After the company provided him with a DLA, however, HM Revenue and Customs (HMRC) took the view that this breached the 'extraction of value' rule contained in Section 809VH(2) of the Act, so that BIR ceased to apply and the investment would be treated as having been remitted to the UK. HMRC issued a closure notice amending his tax return for 2017/18 to include the amount invested.
He appealed to the First-tier Tribunal (FTT), arguing that receipt of value under the extraction of value rule meant a receipt of net value, in the sense of something that left him better off overall. He also contended that the DLA had been provided in the ordinary course of business and on arm's-length terms and thus was not a breach of the extraction of value rule by virtue of Section 809VH(3) of the Act.
After the FTT dismissed his appeal, he appealed to the UT on the grounds that the FTT had erred in its construction and application of Section 809VH(2) and specifically its conclusions on receipt of value. He also argued that, if the DLA was a receipt of value within Section 809VH(2), the FTT had erred in finding that it was not on arm's-length terms and did not fall within Section 809VH(3).
In the UT's view, the meaning of 'value' in Section 809VH(2) was clear. It did not require the recipient to be better off and that interpretation did not lead to absurdity. Inserting the term 'net' would be a material rewriting of a definition that Parliament could very easily have made express, and had chosen not to. Such a radical change from the plain meaning would need to be clearly justified. Furthermore, requiring taxpayers, HMRC and potentially the FTT to determine whether an extraction was of net value to the recipient would be unworkable or impracticable.
The FTT had decided that the DLA was not provided on arm's-length terms because it was created informally and was interest free, unsecured and repayable on demand. The UT agreed that the FTT had been right to do so, also noting that the DLA had not been treated as the receipt of income for Income Tax purposes as required by Section 809VH(3)(a).