This case of Nicholas Powell v The Commissioners for his Majesty's Revenue & Customs [2025] concerned an appeal against a tax charge of £194,580.60 on a deemed dividend payment of £512,713.89.
The taxpayer was a director of a close company called Thermoline Ltd (Thermoline) and prior to 2 July 2020 he had been its only shareholder. On 2 July 2020, following a share for share exchange, Property Holdings SW Limited (PHSW) became the holding company of Thermoline. The sum outstanding on the taxpayer's director's loan account on 31 March 2020 was £309,338 and by 31 March 2021, this had increased to £512,713.89 (the Debt).
On 16 March 2021 the taxpayer, Thermoline and PHSW entered into a deed of novation in respect of the Debt. The terms of the novation deed were deemed to take effect on 31 December 2020 and the taxpayer's liability to Thermoline was, from that date, novated to PHSW. Under the novation deed, the taxpayer agreed to repay PHSW the Debt and PSHW agreed that it owed Thermoline a sum equivalent to the Debt which was left outstanding on intercompany loan account.
As a close company, Thermoline was liable to corporation tax under section 455 Corporation Tax Act 2010 (CTA) on part of the Debt. Following the imposition of a section 455 charge, relief is available when the relevant loan is released or repaid and relief was claimed by Thermoline (and granted by HMRC) after the novation.
Under section 415 Income Tax (Trading and Other Income) Act 2005 (ITTOIA), where a company has been charged to tax under section 455 CTA and the company releases or writes off the whole of part of the relevant loan(s) made by it, the sum released or written off is subject to income tax and the debtor is treated as receiving a deemed dividend.
The taxpayer in this case did not acknowledge receipt of any deemed dividend whilst HMRC considered that such had arisen as a result of the novation of the Debt to PHSW.
Counsel for the taxpayer argued that: (a) the Debt had not been released or written off, instead it had been fully satisfied or paid by PSHW by way of its acceptance of this indebtedness under the intercompany loan agreement; and (b) the taxpayer did not receive any deemed dividend and should not therefore be subject to income tax under section 415 ITTOIA. HMRC disagreed. It pointed out that previous case law had made it clear that the substitution of one repayment obligation for another did not represent repayment or satisfaction of a debt and that whilst PHSW's agreement to take all the rights and obligations of the Debt may well release the taxpayer from his contractual obligation to pay Thermoline, it did not satisfy his indebtedness from a tax perspective. The novation merely represented a substituted debt. HMRC said that section 415 ITTOIA was an anti-avoidance provision designed to prevent the extraction of value from a close company without the payment of income tax and only where there is no outstanding obligation on any party in respect of a debt or any similar sum, will the relevant debt be considered to have been repaid or satisfied.
The First-tier Tribunal accepted that from a contractual perspective, PSHW's obligation to pay Thermoline in respect of the novated Debt released the taxpayer from his obligation to repay Thermoline. However, from a tax perspective this did not mean that the Debt had been satisfied or paid and nor did the fact that Thermoline had no right to pursue the taxpayer for the Debt after the novation. The Tribunal determined that only when there was no outstanding obligation on any party in respect of the Debt could Thermoline be considered to have recovered its money.
The Tribunal rejected the taxpayer's appeal and concluded that HMRC was correct to apply the section 415 ITTOIA charge.
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