Two loans better than one – FTT allows taxpayer's appeal in 'benefit in kind' case

12 June 2014

In the recent decision of the First-tier Tribunal (Tax Chamber) (FTT) in Elizabeth Amri v HMRC, the FTT rejected HMRC’s interpretation of the employment-related loan legislation contained in Chapter 7, Part 3, ITEPA 2003 and allowed the taxpayer’s appeal.


The appellant taxpayer, Ms Elizabeth Amri, was an employee of HBOS plc (HBOS). She decided to transfer her mortgage from Birmingham Midshires and applied for a mortgage of £140,000 from her employer on normal commercial terms and, in the course of the loan application, learnt that she was entitled to a staff loan, on beneficial terms, of £35,000.  She decided to take advantage of this facility.

Ms Amri received a letter from HBOS dated 10 January 2008, which informed her that her new mortgage account was now open.  The letter also confirmed that the mortgage was an "interest only" mortgage, and went on to refer to two products as applying to the mortgage account.  The first of these, "STF004", was a loan of £35,000 at an interest rate of 5.5% (then the Bank of England base rate).  The second product, "CMC156", was a loan of £105,000 at an interest rate of 6.24% (0.74% above base).

Ms Amri first became aware of the tax consequences of receiving a staff loan on beneficial terms (as a benefit in kind) when she received a letter dated 29 September 2011 from HMRC, by which she was informed that it intended to open an enquiry into her tax return and requested a copy of her P11D (expenses and benefits) form for the year ending 5 April 2010.

Ms Amri asked HBOS for her P11D form and on being supplied with a copy queried the assessment of benefit in the sum of £5,438.  HBOS explained to Ms Amri that HMRC would treat the entire sum of £140,000 as a staff loan.  Ms Amri requested that HBOS amend her P11D to reflect the fact that the staff loan benefit related only to £35,000, but they refused to do so (HBOS apparently following a process agreed with HMRC).

FTT's decision

HMRC relied upon section 175 ITEPA 2003, and argued that the entire amount of £140,000 should be regarded as a single "taxable cheap loan". 

Although section 176 ITEPA 2003, provides that where a loan is made on ordinary commercial terms it is not considered to be a "taxable cheap loan" and is exempt from the employment-related loan provisions, HMRC treated the £140,000 as a single loan, and argued that this section did not therefore apply to the facts of Ms Amri's case.

Ms Amri’s position was that the bulk of the loan (£105,000) was made in the ordinary course of business and on terms available to the general public and accordingly it fell within the exception contained in section 176 and should not therefore be considered to be a "taxable cheap loan", for the purposes of section 175.

It was agreed by the parties that if Ms Amri had taken out a £35,000 mortgage at the "staff rate" with HBOS but had borrowed the additional £105,000 from another lender, on exactly the same conditions as provided by HBOS, there would have been no assessment by HMRC of the £105,000.

The FTT concluded that the loan of £105,000 was not an employment-related loan because it was separate and distinct from the loan of £35,000, and was available to the general public.

In the FTT's view, there were two loans.  One for £35,000, correctly chargeable as earnings under section 175 ITEPA as a "taxable cheap loan".  There was a separate loan for £105,000, which was an ordinary commercial loan which satisfied the exemption contained in section 176 ITEPA.  Accordingly, Ms Amri's appeal was allowed.


The FTT’s decision in this case is a sensible one.  What may have been persuasive was the fact that Ms Amri’s initial approach to her employer was for a loan of £140,000 on commercial terms.  It was only during the application process that she became aware that she was entitled to a staff loan of £35,000 on beneficial terms.  Given that there were two loan references and two different sets of terms, it is surprising that HMRC chose to tax Ms Amri on the full averaged benefit of a loan of £140,000 and it is to Ms Amri's credit that she pursued her appeal to the FTT, where she was vindicated.

This blog was written by Nigel Brook.