An elaborate string of transactions comprising pounds worth millions of director's loans among subsidiaries and the group holding organisation were not utilised for tax evasion motives, GAAR Advisory Panel concludes.
This decision includes the reimbursement of a participator loan through transactions including group organisations, where the GAAR Advisory Panel was exploring if the organisation utilised the plan to steer clear of corporation tax.
The organisation, let's call it ABC enterprise, had been operating for a couple of years and had active daughter companies; for the duration ended 31 May 2014, reportedly, there was a profit of above £60m excluding tax. In 2016 ABC enterprise went through restructuring, and the possession was given to a holding organisation.
The issue with HMRC emerged on the grounds of how taxes on loans to participators were dealt with and the demand for tax based on s455 Corporation Tax Act 2010 (CTA 2010). However, the GAAR panel stated that in this situation, the loans 'did not seem to include what may be titled a marketed pre-packaged scheme with atypical and seemingly non-commercial steps'.
On 1 June 2015, James, a manager of the group of organisations, had a director's loan account (DLA) with ABC enterprise, which was in credit amounting to £188,415.49. Nonetheless, during the following year, James acquired additional loans from various organisations which were a part of the group totalling £9,994,451.97 worth of debt owed to a daughter company by Mr James on 31 May 2016. In the upcoming years, James took out additional loans from different organisations and infrequently repaid through different loans and reimbursements between the group of organisations.
In January 2018, the company's accountant expressed that the organisation would be chargeable for corporation tax.
HMRC's conflict is that a tax benefit to ABC Enterprise emerges through its not paying the total amount to corporation tax based on s455 CTA 2010 on the DLA amount on 31 May 2016, which summed up to £9.99m then.
HMRC didn't state the total tax amount owed, and in its Paragraph 6 Notice of 30 September 2021, it expressed that it would take into account the amount if it goes ahead with its concluding GAAR counteraction.
According to the financial advisers to ABC Enterprise, the borrowing of money by James was not exploitative but actually a rational step to take, even if the intent behind this move was to avoid tax liability. They point out that whether James took a loan from a third party or another organisation in the group, it doesn't have an impact.
The GAAR panel expressed: 'The motive of the s455 CTA 2010 legislation is to apply tax on funds given to participators. It is common ground that James's DLA amount was a result of these loans and so would be subject to tax.
'In case the loan is repaid during nine months of the company's year-end, the s455 provisions allow for the tax to be abolished. For this case, the loan was cleared within due time, making the tax charge void. Although, the adequacy of that reimbursement for tax reasons is disputed.'
Prior to settling on a decision, the GAAR panel stated that the present legislation didn't effectively take group organisation loans into account. It said, 'Not taking group loans into account indeed seems a concerning matter, and it does not seem feasible to us that GAAR can be applied to deal with such a gap.'
According to the panel, the scheme wasn't to evade tax, and it stated, 'the actions that took place in 2016 to 17 and which are the concern of the pertinent HMRC notice cannot be termed as not rational. Therefore, we rule that it was fair for the taxpayers to have gone through the course of actions that they did.'
According to The GAAR Advisory Panel, entering into tax arrangements was a rational decision with regard to the pertinent tax provisions.
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