Atherley - qualifying loan write off created an allowable loss

In Douglas Atherley v HMRC [2018] UKFTT 0408 (TC), the First-tier Tribunal (FTT) has held that the  partial writing off of a loan made by the taxpayer to a company of which he was the sole shareholder, created an allowable loss under section 253(3), Taxation of Chargeable Gains Act 1992 (TCGA).

Background

Douglas Atherley (the taxpayer) was a stock broker who had an interest in interior design. Having received some acclaim for the restoration of two of his own flats in London and New York, he decided to become a professional interior designer and in 2002 established Kinari Ltd, through which he conducted his interior design business.

The taxpayer became established in the residential market but decided to move into the more lucrative commercial property market.   

Kinari was funded through a loan account. After several years of loss making, the company owed the taxpayer £616,959. In January 2013, the taxpayer decided to write off £350,000 of the loan. The business was then to be wound down in such a way that all creditors would be paid.

Kinari ceased trading in 2016

The taxpayer attempted to claim loss relief for the loan write off under section 253(3), TCGA. This section stipulates that if a qualifying loan has been made, as defined in section 253(1) (it was accepted that there had been a qualifying loan) and any amount of that loan has become irrecoverable, it can be claimed as an allowable loss.

HMRC did not accept that the loan was irrecoverable and relied upon section 253(12), which provides:

"(12) References in this section to an amount having become irrecoverable do not include references to cases where the amount has become irrecoverable in consequence of the terms of the loan, of any arrangements of which the loan forms part, or of any act or omission by the lender ... ".

HMRC's position was that the loan was not "irrecoverable" at the time it was written off as Kinari continued to trade and the taxpayer lent a further £65,000 to the company. In HMRC's view, this suggested that the taxpayer did not believe that the loan was truly irrecoverable. In support of this assertion, HMRC pointed to the fact that the loan write off was only partial and claimed that Kinari could have obtained a bank loan to satisfy the debt. As the write off was an "act" by the lender the amount written off was not irrecoverable and HMRC rejected the taxpayer's claim.

The taxpayer appealed.

FTT decision

The appeal was allowed.

In the FTT's view, there was objective evidence that the £350,000 was irrecoverable in January 2013. The fact that the write off was "partial" did not create a difficulty for the taxpayer as partial write offs of loans are common in other areas  of commercial life.

The fact that there was a remote possibility that the loan might be repaid was therefore irrelevant. Given its loss making record, the FTT rejected as "fanciful" the suggestion that a bank loan could have been obtained by Kinari and used to repay the loan.

Comment

Interestingly the FTT pointed to the subsequent demise of the company as evidence to support its assessment that the loan had become irrecoverable. Although not relevant in this case, if Kinari had been more successful in subsequent periods the implication is that HMRC's position would have been stronger.   

Although cases of this type will turn on their own particular facts, the FTT did suggest that, for the purposes of section 253(12), an "act" must be the sort of act which would prevent the company repaying the loan. There was no such arrangement or act in the present case. A decision to cease to carry on an unprofitable business was not an act, for the purposes of section 253(12).