A case of interest?

In Garnett Paul Curran v HMRC [2012] UKFTT 517 (TC), the First-tier Tribunal (‘FTT’) has given some helpful guidance on what constitutes interest...

…and also confirmed that HMRC are not entitled to simply disregard a settlement agreement in order to raise discovery assessments. In allowing the appeal, the FTT held that:

1. the appellant was entitled to claim relief under section 353 of Income and Corporation Taxes Act 1988 (‘ICTA 1988′) in relation to certain payments of interest he had made to lenders; and
2. a settlement agreement entered into between the appellant and HMRC precluded HMRC from raising discovery assessments against him in respect of earlier tax years.

The facts

Mr Curran had received loans in 2002, 2003 and 2007 from three different companies and made payments in respect of each of the loans to these companies in the corresponding tax years. Mr Curran claimed relief for these payments as payments of interest pursuant to section 353 ICTA 1988.

HMRC later claimed that Mr Curran had not been entitled to claim such relief and issued discovery assessments against him in relation to tax years 2001/2002 to 2005/2006.

In 2005 Mr Curran and HMRC entered into a settlement agreement in respect of his income tax position for the years 2001/2002 and 2002/2003 and HMRC made repayments of tax to Mr Curran.

HMRC’s arguments

Interest

HMRC argued that the payments made by Mr Curran were not payments of interest because they were:

1. payments in lieu of the interest which would otherwise have become payable under the relevant loan agreements; or
2. capital payments resulting either, as payments in lieu of interest which would otherwise have become payable under the relevant loan agreement, or repayments of the loan principal.

Further, and in the event that these payments were found to constitute interest, HMRC argued that relief under section 353 of ICTA 1988 should be denied either because:

1. it was paid at a rate in excess of a reasonable commercial rate; or
2. it was prohibited by section 787 ICTA 1988 on the basis that the main benefit expected to accrue as a result of the loan transactions was obtaining a reduction in tax liability by means of section 353 ICTA 1988 income tax relief.

Settlement Agreement

HMRC argued that the settlement agreement was invalid because:

1. it was ultra vires as a forward tax agreement; and
2. it was voidable for material non-disclosure on the part of the appellant.

The appellant’s arguments

Mr Curran argued that the interest he had paid was paid at a commercial rate. This was to be calculated by reference to the 30-year period of the loans and not the period of time that had elapsed when he made the payments. In relation to HMRC’s arguments regarding section 787 ICTA 1988, Mr Curran argued that the transactions entered into by him were genuine, and involved real commercial risk and real commercial rewards and accordingly the sole or main benefit was not the obtaining of interest relief.

With regard to the settlement agreement, Mr Curran argued that it was binding on HMRC from the first date on which HMRC had made a tax repayment to him in performance of the settlement agreement.

The FTT’s decision

The FTT adopted a constructive approach when considering the payment agreements between Mr Curran and the companies. The FTT was of the view that the payments fulfilled Mr Curran’s obligations to pay interest arising out of the parties’ agreement to lend and borrow at interest and their agreement that any such interest be paid in advance and on discounted terms.

Further, having consideration to relevant case law, the FTT confirmed that:¹

“the simple test of what constitutes interest is that it is a payment for the use of money, or, taking the other side of the coin, a payment received for the deprivation of money by reference to the period of time of that use or deprivation“.

The FTT agreed with Mr Curran that interest relief under section 353 was not prohibited by section 787 because the obtaining of interest relief was not the sole or main benefit that might have been expected to accrue to Mr Curran from the loan transactions because for each loan Mr Curran had obtained the benefit of loan notes which outweighed the section 353 relief in terms of financial value.

With regard to the settlement agreement, it was held that this was binding on both parties as it was not ultra vires nor had there been material non-disclosure by Mr Curran sufficient to render the agreement voidable.

Comment

Although many advisers had thought the position to be clear, in allowing Mr Curran’s appeal, the FTT has provided further confirmation of what constitutes interest. It is to be hoped that HMRC will, in future, adopt a sensible commercial approach when considering whether payments made by a taxpayer constitute interest.

Given HMRC’s current preoccupation with issuing discovery assessments, it is reassuring that the FTT will not permit HMRC to escape the consequences of a settlement agreement which they have entered into simply because they are of the view that they have made a ‘discovery’. HMRC’s failed attempt to avoid the consequences of a settlement agreement that they had freely entered into with Mr Curran does them little credit.

¹In Bennett v Ogston (1930) 15 TC 374 it was held that interest is a “payment by time for the use of money”; in Bond v Barrow Haematite Steel [1902] 1 Ch 353 interest was held to be “compensation for a delay in payment”; in Riches v Westminster Bank Limited [1943] 2 ALL ER 725 it was held that the “essence of interest is that it is a payment which becomes due because the creditor has not had his money by a due date”.