[2010] UKFTT 298 (TC)

TC00586

Appeal number: SC/3150/2008

LOAN RELATIONSHIPS – Debits and credits – Debt arising from Transaction for lending of money – Whether Appellant has established a lending of money – No – Whether Appellant’s partial waiver of debt due from connected person affects amount of Appellant’s credits – No – Appeal dismissed – FA 1996 ss. 81(1)(c) and 85(3)(c)

FIRST-TIER TRIBUNAL

TAX 

	M J P MEDIA SERVICES LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Corporation Tax)	Respondents

				TRIBUNAL: 	SIR STEPHEN OLIVER QC
						MS ANNE REDSTON

Sitting in public in London on 24 and 25 May 2010

Mr David Goldberg QC and Miss Hui Ling McCarthy, instructed by Berwin Leighton Paisner, for the Appellant

Mr David Ewart QC and Mr James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	MJP Media Services Ltd (“MJP”) included in its 2004 corporation tax computation a deduction of £6,690,000 for a loan relationship debit. HMRC disallowed this deduction and issued a Notice of Amendment to the return. MJP appeals this Notice of Amendment. 
The facts
2.	The following facts are not in dispute. 
3.	For the period in question, MJP was a wholly owned subsidiary of Carat International (“Carat”); Carat was a wholly owned subsidiary of Aegis plc (“Aegis”). Aegis was listed on the London Stock Exchange. The companies used the accruals basis of accounting. 
4.	Between 2001 and 2004 a series of inter-company transactions took place between MJP and Aegis. By 1 January 2004, Aegis owed MJP £6,815,366. 
5.	At some date between 1 January and 26 March 2004, Mr Ashley Milton on behalf of MJP, and Mr John Ross, on behalf of Aegis, signed a document stating that MJP had loaned Aegis the sum of £6,815,366. The document was not dated, but was stated to be “made effective from 1 January 2004”. Interest was to be charged at base rate plus 1%. 
6.	On 26 March 2004, Mr Milton on behalf of MJP, and Mr Ross on behalf of Aegis, signed a document entitled “Deed of Waiver” (“the waiver”). The debt before the waiver was £6,893,977, being £6,815,366 plus accrued unpaid interest of £78,611. The amount waived was £6,704,000. This left an amount owing of £189,976. 
7.	MJP claimed a deduction in its 2004 corporation tax computation for £6,690,000, being the waived amount reduced by a foreign exchange difference of £14,000. 
The issues 
8.	There are two issues. Firstly, whether this inter-company debt was a “transaction for the lending of money” and so within the definition of a loan relationship in section 81 of Finance Act 1996 (“FA 1996”). 
9.	Second, if a loan relationship subsisted, whether MJP’s waiver of part of that loan allow it to claim a deduction in its tax computation for the waived amount. 
The evidence
10.	The Tribunal was provided with over 26 bundles of documents, but few were referred to during the hearing. 
11.	Witness statements were provided on behalf of MJP by seven individuals, four of whom gave evidence before us and were cross-examined by Mr Ewart. These were Colin Richards, Head of Aegis Group Tax; Michael Parry, Aegis Group Transfer Pricing Manager and director of MJP; John Ross, Aegis Group Company Secretary, and Susan Walker, Aegis Tax Compliance Manager. Mr Richards and Mr Parry are qualified accountants. Mr Richards joined Aegis in March 2002 and Ms Walker in April 2007. Mr Parry and Mr Ross were employed by Aegis throughout the period under consideration.
12.	The remaining three witness statements were provided by Alicja Lesniak, Aegis Chief Financial Officer and a director of Aegis; Lynda Poor, Head Office Reporting Manager and Susan Frogley, Chief Finance Office of Aegis Media and a director of Carat International. 
13.	Ms Lesniak gave evidence as to the role of Mr Ross, and his authority to act on behalf of Aegis. The rest of her evidence, and that of Ms Poor and Ms Frogley, concerns the extraction of documents for the purposes of this appeal.
14.	Evidence as to the signing of the loan agreement was sought by Mr Ewart from both Mr Richards and Mr Ross. Neither was able to provide a date on which the agreement was signed. 
15.	The remainder of the evidence relates to the first issue, and it is thus convenient to set it out under that heading. The second issue is purely a question of law. 
The statutory provisions 
16.	Chapter II, Part IV, FA 1996, deals with loan relationships. The provisions relevant to this case are set out below.
17.	The main charging provision is at section 80:
		(1)	For the purposes of corporation tax all profits and gains arising to a company from its loan relationships shall be chargeable to tax as income in accordance with this Chapter
		(2)	To the extent that a company is a party to a loan relationship for the purpose of a trade carried on by the company, profits and gains arising from the relationship shall be brought into account in computing the profits of the trade…
		(4) 	This Chapter shall also have effect for the purpose of corporation tax for determining how a deficit on a company’s loan relationship is to be brought into account in any case…
		(5)	Subject to any express provision to the contrary, the amounts which in the case of any company are brought into account in accordance with this Chapter as respects any matter shall be the only amounts brought into account for the purposes of corporation tax as respects that matter. 
18.	A loan relationship is defined in section 81, FA 1996 :
	“(1) Subject to the following provisions of this section, a company has a 	loan relationship for the purposes of the Corporation Taxes Acts wherever: 
	(a) the company stands (whether by reference to a security or otherwise) in the position of creditor or debtor in respect of any money debt; and
	(b) that debt is one arising from a transaction for the lending of money; 
		and references to a loan relationship and to a company’s being party to a loan relationship shall be construed accordingly…
	(3) …where an instrument is issued by any person for the purpose of representing security for, or the rights of a creditor in respect of, any money debt, then (whatever the circumstances of the issue of the instrument) that debt shall be taken for the purposes of this Chapter to be a debt arising from a transaction for the lending of money.
19.	Section 84 is headed “debits and credits to be brought into account”:
		(1)	The credits and debits to be brought into account in the case of any company in respect of loan relationships shall be the sums which, in accordance with an authorised accounting method and when taken together, fairly represent for the accounting period in question:
		(a) all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationship and related transactions; and 
		(b) all interest under the company’s loan relationship and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions…
		(7)	This section has effect subject to Schedule 9 to this Act (which contains provision disallowing certain debits and credits for the purposes of this Chapter, and making assumptions about how an authorised accounting method is to be applied in certain cases.
20.	Section 85 sets out the accounting methods authorised for the purposes of the loan relationship legislation:
	(1) Subject to the following provisions of this Chapter, the alternative accounting methods authorised for the purposes of this Chapter are:
		(a) an accruals basis of accounting…
	(2)	 An accounting method applied in any case shall be treated as authorised for the purposes of this Chapter only if…
		(b) it contains proper provision for allocating payments under a loan 	relationship…to accounting periods…
	(3) In the case of an accruals basis of accounting, proper provision for allocating payments under a loan relationship to accounting periods is provision which…
	(c) assumes, subject to authorised arrangements for bad debt, that, so far as any company in the position of creditor is concerned, every amount payable under the relationship will be paid in full as it becomes due; 
	(d) secures the making of the adjustments required in the case of the relationship by authorised arrangements for bad debt; and 
	(e) provides, subject to authorised arrangements for bad debt…that, where there is a release of any liability under the relationship, the appropriate amount in respect of the release is credited to the debtor in the accounting period in which the release takes place….
	(5) In this section:
		(a) the references to authorised arrangements for bad debt are references to accounting arrangements under which debits and credits are brought into account in conformity with the provisions of paragraph 5 of Schedule 9 to this Act…
21.	Section 87 FA 1996 requires the use of an accruals basis of accounting between connected parties. It was accepted that MJP and Aegis were connected within the meaning of section 87.
22.	Schedule 9, paragraph 5 of FA 1996, under the heading of “Bad debt etc” states that:
	(1) in determining the credits and debits to be brought into account in accordance with an accruals basis of accounting, a departure from the assumption in the case of the creditor relationship that every amount payable under those relationships would be paid in full as it becomes due shall be allowed (subject to paragraph 6 below) to the extent only that: 
		(a) a debt is a bad debt; 
		(b) a doubtful debt is estimated to be bad; or 
		(c) a liability to pay any amount is released.
	(1A) Such a departure shall be made only where the first and second conditions (set out in sub-paragraphs (2) and (2A) below) are satisfied.
	(2) The first condition is that the accounting arrangements allowing the departure also require appropriate adjustments, in the form of credits, to be made if the whole or any part of an amount taken or estimated to represent an amount of bad debt is paid or otherwise ceases to be an amount in respect of which a departure is allowed…
	(3) Where:
		(a) a liability to pay an amount under a debtor relationship is released; 	and 
		(b) the released takes place in an accounting period for which an 		authorised accruals basis of accounting is used as respects that 	relationship,
	no credit in respect of the release shall be required to be brought into account in the case of that company if…the relationship is one as respects which section 87 of this Act requires the use of an accruals basis of accounting. 
23.	Schedule 9, paragraph 6 is headed “Bad debt etc where parties have a connection” and reads:
	(1) This paragraph applies where for any accounting period section 87 of this Act requires an authorised accruals basis of accounting to be used as respects a creditor relationship. 
	(2) The credits and debits which for the period are to be brought into account for the purposes of this Chapter in accordance with that accounting method shall be computed subject to subparagraphs (3) to (6) and paragraphs 6A and 6B below. 
	(3) The assumption that every amount payable under the relationship will be paid in full shall be applied as if no departure from that assumption was authorised by virtue of paragraph 5(1) above, save where it is allowed by sub-paragraph 4 or paragraphs 6A or 6B below….
	(6) Where the company ceases in the accounting period in question to be a party to the loan relationship:
		(a) the debits brought into account for that period in respect of the 	relationship shall not…be more than they would have been had the 	company not ceased to be a party to the relationship; and
		(b) the credits to be brought into account for that period in respect of 	the relationship shall not…be less than they would have been in those 	circumstances.
24.	It was common ground that, in Schedule 9 paragraph 6 of FA 1996, none of subparagraphs 4, 6A or 6B applied to the transactions in question. 
The first issue: does the debt arise from a “transaction for the lending of money”
The arguments
25.	The primary argument advanced by David Goldberg QC for MJP was that Aegis’s debt to MJP consisted of a series of cash payments; they were thus self-evidently “for the lending of money”. Mr Ewart QC for HMRC argued that MJP had not proven, to the required standard, that the transactions were of money or “cash” thereby amounting to the lending of money. We have called this “the cash payments argument”.
26.	Mr Goldberg argued that, if this was found not to be the case in relation to one or more of the transactions, then MJP should succeed for the following reasons: 
(a)	that if MJP had settled a debt due to Aegis, such transactions were still “for the lending of money”. We have called this “the indirect payment argument”; and
(b)	that the substitution of one party by another did not prevent it being a loan relationship. This is discussed under the heading “the substitution argument.”
27.	Mr Goldberg put forward several other arguments in the course of the hearing. These, and Mr Ewart’s responses, have been summarised under “other contentions”. 
28.	For completeness, we note that Mr Goldberg abandoned, at the inception of the hearing, the argument that by signing the loan agreement the parties had automatically brought themselves into the loan relationship provisions by way of section 81(3). 
The cash payments argument
Background
29.	The debt owed by Aegis to MJP before the waiver on 24 March was £6,893,977. After the waiver of £6,704,000, an inter-company debt of £189,977 remained in place. 
30.	It was common ground that MJP’s case depended on there being a partial waiver: if a loan relationship with a connected party is written off completely, the debtor company (here MJP) would have been precluded by paragraph 6(6)(a) Schedule 9 of FA 1996 from obtaining a deduction in its corporation tax return. 
31.	 The inter-company debt in this case was made up of a number of different transactions, each of which was for an amount greater than £189,976. Mr Ewart thus argued that if MJP was unable to prove that any one of these transactions was not “for the lending of money”, HMRC must succeed. Mr Goldberg did not dispute the correctness of this analysis, and we also agree with it. 
32.	The Tribunal thus sets out below the evidence provided by MJP for each of the individual transactions, which together went to make up the debt of £6,893,977. 
The evidence generally
33.	MJP’s case was that cash had been transferred from MJP to Aegis each time the inter-company debt increased. It would have been simple to evidence this assertion by way of bank statements, which would clearly demonstrate the transfer of funds. However, only one of the debits was supported by a bank statement. 
34.	MJP did not argue that the cash had been transferred otherwise than via the banking system, but said that it had not proved possible to locate the other bank statements. In total, only four bank statements were provided to the Tribunal, a single page from the company’s NatWest account and three sequential statements from Lloyds TSB. 
35.	Mr Ewart cross-examined Mr Richards, Mr Parry and Ms Walker about the missing statements. He asked Mr Richards if, having failed to locate the documents, he had asked the bank to produce copies. Mr Richards said he couldn’t “recollect whether we actually did that or not.”
36.	 He asked Mr Parry if he had been asked to provide bank statements for the purposes of this litigation. He replied:
			“I was not asked to provide bank statements for the purposes of this litigation…I was not asked anything about bank statements or to go and find them or anything like that.”	
37.	During examination in chief, Ms Walker said that she had searched for the statements and realised they were not complete. She then says:
			“I contacted my colleagues in the treasury department to see if they had anything in their archives. They carried out a search of their archives and they did not produce anything additional. I then asked them to contact the bank to see if they could obtain any further bank statements, but we were unable to obtain anything and my colleagues in treasury said that it is quite difficult to obtain old bank statements from our bank. So the ones presented as evidence are the only ones that we were able to locate.”
38.	In addition to the absence of bank statements, there was a further difficulty. None of MJP’s witnesses had first hand knowledge of the inter-company debits at issue in this case: there was no witness from Aegis’s treasury department, despite the fact that they had responsibility for managing the group’s funds and even though they were the best placed to explain what had happened to the bank statements. 
39.	The Tribunal was instead taken by Mr Goldberg on a journey through a jigsaw of accounting entries, mostly from MJP’s ledger, with supporting roles played by the companies’ statutory accounts and by Aegis’s Nominal Audit Trail. Furthermore, none of MJP’s witnesses had written up the ledger; when giving evidence they made it clear that they were simply using their financial training to interpret the records. 
The first transaction: £686,500
40.	As at 31 December 2000, according to the MJP ledger, MJP owed £293,244 to Aegis. On 30 July 2001 Aegis made a VAT payment of £101,500 on behalf of MJP, increasing the balance on the intercompany account to £394,744.
41.	On 3 September 2001 a sum of £686,500, described as “payment”, is shown in MJP’s inter-company ledger account with Aegis; there is a matching entry in MJP’s ledger for the Lloyds bank account, labelled “Aegis Group plc.”
42.	It was MJP’s case that this transfer was made in cash, and that the contra entry in the ledger account for Lloyds bank demonstrated that this was so. No-one gave first hand witness evidence in relation to this transfer, and there was no other evidence apart from the ledger. 
43.	In his closing speech Mr Ewart drew the Tribunal’s attention to the fact that this sum was described as a “payment”, the same wording as was used for the second transaction. As set out below, his case was that this transaction was not a cash transfer to Aegis, but a payment to a third party on Aegis’s behalf. 
44.	As a result of this transaction, Aegis owed MJP £291,756 (686,500 - 394,744) at the beginning of 2002.
The second transaction: £830,500
45.	On 5 June 2002 MJP’s intercompany account with Aegis shows a further debit of £830,500, again described as “payment”. This is matched by a credit of the same amount and on the same date, in the ledger account for MJP’s Lloyds Bank account, labelled “Aegis Group plc”.
46.	This transaction appears on one of the four bank statements submitted as evidence. It shows a sum of £830,500 paid out on 13 June and gives reference number 000145. Under cross-examination Mr Parry confirmed the presence of the reference number showed that the payment had been by cheque. 
47.	Both Mr Parry and Mr Richards, under cross-examination, said that inter-company transfers would normally be carried out electronically. Mr Parry’s evidence was as follows:
			“Mr Parry: We have an electronic banking system with our bank and for large sums of money, it would have been transferred by a sort of online banking transfer, for which I would have been a signatory or an approver to that banking transaction and typically for large transactions, it would not have been by a cheque or anything like that.
			Mr Ewart: And by large, would you include an £830,000 payment? Would that count as large? Would £830,000 be large?
			Mr Parry: it would be large, yes.”
48.	Mr Parry also agreed with Counsel that making an inter-company payment by way of cheque would cause the group to lose interest for around 5 days, and thus would be “stupid”. 
49.	It was HMRC’s case that, on this evidence, the £830,500 had been made to a third party, and not to Aegis. Since MJP’s book-keeping entries would be the same, whether Aegis had been paid directly, or whether Aegis had asked MJP to pay a creditor on its behalf, the ledger entries did not prove that the payment had been made to Aegis in cash. 
50.	Mr Goldberg, in reply, took the Tribunal to evidence supporting there having been a cash receipt by Aegis. This was the Nominal Ledger Audit trail, which consisted of extracted entries from Aegis’s ledger, setting out transactions between MJP and Aegis. For 2002 it has an entry dated 25 June, showing a receipt by Aegis of £850,500. This is described as “MJP re I/Co MJP”, and under Journal Type is printed “2961 Cashb”. Mr Goldberg described this as “a record of the cash turning up” in Aegis. 
51.	There was no supporting witness evidence. Although in his witness statement Mr Rogers said that MJP “loaned surplus cash totalling £830,500 to Aegis”, under cross-examination he accepted that he had no first-hand knowledge of the transaction and was relying on the book-keeping entries. Mr Parry also said he had no involvement. 
52.	To summarise, there is independent third party evidence (from the bank account) that MJP paid £830,500 by cheque, with this sum clearing through its bank account on 13 June, some 7 days after the book entry in MJP’s ledger. There is internal evidence (from Aegis’s Nominal Ledger Audit Trail) that cash of the same amount was received by that company on 25 June, 12 days after the cash had cleared through MJP’s bank account and 20 days after it was deducted in MJP’s own ledger. 
The third transaction: £6,101,401
53.	At the beginning of 2002, Aegis owed over £6m to Carat, MJP’s parent company. This is shown in Carat’s statutory accounts. MJP’s internal records show that Carat in turn owed £6,101,401 to MJP. 
54.	Mr Richards gave evidence that in September, a circular transaction occurred. Aegis repaid £6,101,401 of the money it owed to Carat; Carat repaid the same sum to MJP, and MJP then paid this amount to Aegis. Aegis thus had exactly the same money as before, but it was now in debt to MJP rather than to Carat. When asked by the Tribunal why these transactions had taken place, Mr Richards said that he did not know.
55.	When pressed by Mr Ewart on how the transfers were made, Mr Richards said three times that he was not involved in the transaction, and that he was giving evidence from the accounting records only; he stated that he was not “aware of the actual mechanics of how the transfer was done.”
56.	The Tribunal was told by Mr Goldberg that the evidence for the first step, the repayment by Aegis of £6.1m owed to Carat, can be seen in Carat’s statutory accounts for the year ended December 31 2002. This shows that the debt owed by Aegis to Carat has gone down by more than £6.1m. The same point was made by Mr Richards both in his witness statement and orally. Under cross-examination, he was unable to point to any other supporting evidence for this repayment. No inter-company balances, cash books or bank statements were produced to the Tribunal to explain how the transaction was accomplished.
57.	The second step was the repayment by Carat of the debt it owed to MJP. The existence of a debt of this amount is evidenced by the ledger account for MJP’s intercompany balance with Carat, which shows a debt owed to MJP of £6,101, 410 at 1 January 2002. On 4 September 2002, the same ledger account shows a credit of the same amount, in effect eliminating Carat’s debt to MJP. 
58.	Mr Ewart submitted that had this debt been repaid in cash, there would have been a matching entry in the ledger account for the bank. Instead, the matching entry is in the MJP’s ledger account with Aegis: the entry is also dated 4 September and show that the amount it was owed by Aegis increased by £6,101,401.
59.	In effect, the ledger shows that MJP is no longer owed £6.1m by Carat; instead, it is owed the same amount by Aegis. It was accepted by Mr Goldberg on behalf of MJP that the ledger entries indicated that cash did not move from Carat to MJP, but rather that Carat’s debt to MJP had been replaced by a debt from Aegis. 
60.	This is reflected in MJP’s 2002 statutory accounts, which show a debt owed by Aegis to MJP of £6,312k. This figure can be reconciled to the intercompany accounts as follows:
(a)	The 2002 opening balance of £291,756, plus the second and third transactions set out above (£830,500 + £6,101,401) total £7,243,657.
(b)	This sum is reduced by various transfers made to, or on behalf of MJP by Aegis, which total £911,169. 
(c)	£7,243,657 - 911,169 = 6,312, 488
61.	The statutory accounts thus provide supporting evidence that Aegis’s debt to MJP increased by £6.1m during 2002. 
62.	This, however, does not prove that there was any cash payment between the parties. Mr Ewart’s case was that no cash changed hands. Aegis’s debt to MJP went up by the same amount as its debt to Carat goes down - this was the automatic consequence of MJP taking over Aegis’s debt to Carat in exchange for cancelling Carat’s own debt. 
63.	The only way in which MJP could pay cash to Aegis as part of this triangular arrangement, would be if cash had previously moved from Aegis to Carat, and then from Carat to MJP. Mr Goldberg, however, accepted that there had been no such transfers.
64.	Mr Ewart said that if cash had moved from MJP to Carat in addition to the entries shown in the books, then the Aegis debt would have increased by £12.2m, not £6.1m. 
65.	However, Mr Goldberg argued that cash had moved, and that this movement was part of this triangular transaction. Two pieces of evidence were provided to support MJP’s case that this final transfer had been in cash. 
(a)	The first was Aegis’s Nominal Audit Trail for 2002, which showed an entry of £6,101,410, labelled “Interco transfer MJP re Carat” and under the heading Journal Type is listed 3051 CashB. The entry is dated 30 September 2002. 
(b)	The second was the Aegis Group Cashbook Transfer Report, which includes a sum of £6,101,401 dated 12 September 2002, described as “MJP re Carat. Interco Trf”. 
66.	Mr Goldberg argued that this was sufficient evidence to show that the transfer had been in cash, and that it was immaterial if the other two transactions had been by way of book entries. Mr Ewart disagreed, and said that it caused double counting of the £6.1m, that there was no witness evidence and no bank statements. The only safe inference was that the transfers were made via book entries only. 
The fourth transaction: £883,418
67.	MJP’s intercompany account with Aegis shows a further transaction of £883,418. This is dated 11 September 2003 and is described as “payment”. The effect of the entry is to increase the debt owed by Aegis to MJP. 
68.	The matching entry of the same date and amount is shown in MJP’s ledger account setting out its balances with National Westminster Bank. It is labelled “Aegis Group plc”. In his witness statement, Mr Richards states that this was a “further advance of surplus cash”. There was no other evidence. 
69.	In his closing speech Mr Ewart drew the Tribunal’s attention to the fact that this sum was described as a “payment”, the same wording as used for the second transaction, and he argued that this, too, was not a cash payment to Aegis, but a payment to a third party on Aegis’s behalf. 
Minor transactions
70.	According to the inter-company account, Aegis’s debt with MJP was further increased by £13,367 at some point in 2003. This was labelled “Exchange on JC Decaux.” It had been included in the loan which was documented in early 2004, but the deduction claimed in the 2004 computation was reduced by £14,000 on account of this exchange difference. According to Mr Richard’s witness statement, the failure to claim a deduction was erroneous, MJP were thus claiming a deduction. It was not made clear to the Tribunal whether an amended return had been submitted.
71.	Mr Goldberg admitted to there being “some confusion” about the sum, pointing out that it was not going to make any difference to the outcome of the case because of its small amount. Even were it to be ignored, there would still be a partial waiver. 
72.	The intercompany balance was also reduced by two payments made on MJP's account by Aegis, and then increased again by the accrued interest of £78,611. The final balance on the inter-company account before the waiver was £6,893,976; after the waiver of £6,704,000 the balance stood at £189,976. 
Decision on the cash payments argument
Generally
73.	In claiming a tax relief, the burden of proof is on the Appellant, and the standard of proof is the balance of probabilities. It would have been a simple matter for MJP to prove that the payments were in cash: it had only to produce the relevant bank statements. 
74.	The companies had apparently not retained copies of their bank statements. These are classed as business records for VAT purposes (VAT Notice 700 paragraph 19, given statutory force by SI 1995/2518, Reg 31(2)). As such, they must be retained for six years (VATA 1994, Sch 11 para 6(3)). Although this appeal is unconnected with VAT, these statutory provisions mean that bank statements should have been retained, and thus should have been available as evidence for this case. Moreover, MJP did not put forward any witnesses who could explain their absence. The deduction claimed was also for a significant sum, causing an enquiry to be opened into the return on 18 October 2006, well within the six year period following the transactions. 
75.	It is hard to understand why this basic documentation was not available to explain the transactions. The Tribunal was instead faced with a patchwork of accounting entries and partial documentation. 
Failure to meet the burden of proof
76.	We found that the burden of proof was clearly not met in the following respects:
(a)	it was improbable that a cash payment would be made to a group company by way of cheque, and we agreed with Mr Ewart that the second transaction, for £830,500, was, on the balance of probabilities, not a cash payment to Aegis. Exactly what occurred, and why cash of the same amount turned up some three weeks later in the books of Aegis, we were unable to say, given the paucity of evidence provided, but that was not our task; 
(b)	the intercompany transactions for £6.1m between Aegis and Carat, and Carat and MJP, had, on the evidence provided, been not been made in cash, but by intercompany transfer. As a result, there was an effective assignment by Carat to MJP of the debt owed to it by Aegis, in exchange for MJP writing off the debt it was owed by Carat. This automatically moved Aegis’s debt between Carat and MJP: in other words, MJP stood in the shoes of Carat, without any funds changing hands. We thus agree with Mr Ewart that the book-keeping entries themselves complete the triangle. If further cash was paid by MJP to Aegis (or by Carat to Aegis on behalf of MJP), Aegis would owe £12.1m. If this were the case, the statutory accounts would show a movement of £12.2m and not £6.1. Again, we cannot explain the entries in the Nominal Ledger Audit Trail;  
(c)	 the accrued interest of £78,611 was by definition not paid in cash; 
(d)	we have also excluded the £13,367 as its status was unclear even to MJP.
77.	The amounts we have excluded total significantly more than the waiver. It is thus unnecessary for us to decide whether the other transfers were cash payments to Aegis. 
78.	However, the lack of bank statements, the absence of any witnesses with personal knowledge of the transactions, and the piecemeal documentation (however assembled) are all significant factors. It is for the Appellant to prove its case, and we find that, on the balance of probabilities, MJP also failed to discharge this burden in relation to the remaining transactions.
The indirect payment argument: submissions
79.	Mr Goldberg, without departing from his primary contention that the transactions had been carried out in cash, argued that even if MJP had paid a third party to settle a debt owed by Aegis, this too would constitute a “lending of money” by MJP to Aegis. 
80.	If successful, this argument would be relevant in particular to the second transaction, and possibly to the first and fourth. 
81.	Both parties cited Potts' Executors v IRC [1951] AC 443, where a company discharged the surtax liability of the shareholder; the money paid on his behalf was left on loan account, and he became indebted to the company for that amount. Additional tax assessments were made on the basis that these payments on his behalf constituted loans, and so fell within the charging provisions of section 40 of Finance Act 1938. 
82.	Mr Ewart drew support from Lord Normand’s statement at page 230 that:
		“there is a real distinction between a loan to A to enable him to pay his creditors and a payment to A’s creditors made for the purpose of discharging his debts.” 
83.	Mr Goldberg said that the ratio in Potts concerned whether the sums were paid “directly or indirectly to the settlor”, and thus the comments relied upon by HMRC were obiter. He also referred us to the dissenting judgment of Lord MacDermott, who held that the payments were loans, and to Lord Oaksey’s view, at page 231, that “in the particular circumstances of this case” the payments were not loans, as indicating that in other circumstances third party payments could be loans.
84.	Mr Ewart also referred us to Lord Simond’s leading judgment, where he said, at pages 227-8:
		“The question is still whether the conditions of the composite phrase are fulfilled - were the sums paid to the settlor by way of loan? I do not doubt that in certain contexts money paid at A's request to B may be properly described as ‘paid to A’… But this is not the way in which a taxing statute is to be read. I am not, in the construction of such a statute, entitled to say that, because the legal or business result is the same whether on the one hand I borrow money from the company and with it make certain payments, or on the other hand the company at my request makes certain payments on my implied promise to repay, therefore it is immaterial what words are in the statute if that result is attained.”
85.	We were also taken by Mr Goldberg to the case of HSBC Life (UK) Ltd. v. Stubbs [2002] STC (SCD) 9, and in particular to the following passage (at paragraphs 71 and 73):
		“71. It emerges clearly, therefore, that the mere economic equivalence of a transaction to a loan does not show that it is a loan. The authorities show, equally--as Chitty comments--that the concept of 'loan' or 'lending' may vary from statute to statute if a particular meaning is adopted. In the case of Ch II of Pt IV of the 1996 Act, the concept of a 'loan relationship' is certainly unique to this statute but it does not appear that the underlying notion of the lending of money is to be seen in any way differently from that in which it would be seen generally. The contrary is the case; by specifically referring to the concept of 'a transaction for the lending of money', s 81(1)(b) evidently intends to confine a concept whose extent may otherwise be uncertain within well-known and ascertainable bounds… 
		73. In our judgment, it is impossible to conclude that any of the parties to these transactions thought that they were lenders or borrowers, or that they intended that to be the case.”

86.	Mr Goldberg used this passage as authority for the argument that the intention of the parties is significant, if not decisive. We discuss this point below. Mr Ewart relied on the opening words of paragraph 71 as endorsing his opposition to Mr Goldberg’s indirect payments argument. 
The indirect payment argument: decision
87.	We agree with Mr Goldberg that the ratio of Potts is concerned with whether a third party payment has been made directly or indirectly to a taxpayer. But in considering this issue, their Lordships considered, as an integral part of that question, whether there was a loan. In his leading judgment, Lord Simonds said, at page 227:
	“I must be satisfied that according to the fair meaning of the words these sums were paid by way of loan to the settlor directly or indirectly by the company.” 
88.	In the context of the taxing statute in question, he said:
	“My answer is that according to the ordinary fair meaning of the words the company did not pay any sums to the settlor by way of loan. It would in fact be as inapt to say that the company paid him sums by way of loan when he was in debit on the account as to say that he paid the company sums by way of loan when he was in credit. Some stress was laid on the distinction in the old forms of pleading between the plea for money lent to the defendant and the plea of money paid at the request of the defendant to a third party. I am not inclined to give much weight to this consideration but it does indicate that there is at least a formal difference between the two transactions.”
89.	We have to consider a different taxing statute, but like Lord Simonds, we are constrained by the language used. In interpreting this language, we agree with the Special Commissioners in HSBC Life that, by using the phrase 'a transaction for the lending of money', s 81(1)(b) “intends to confine a concept whose extent may otherwise be uncertain”. 
90.	The phrase “for the lending of money'” is thus a limiting provision as well as a defining one. Helped by the decision in Potts, we find that the plain meaning of the words in FA 1996 does not stretch to include payments to a third party which discharge the debt of another, and thus we agree with HMRC’s interpretation as set out by Mr Ewart. 
The substitution argument
91.	Mr Goldberg argued that if the £6.1m, originally lent by MJP to Carat, had simply been assigned to Aegis rather than being paid in cash, this would not of itself prevent it being a loan relationship. 
92.	Mr Ewart agreed that he was right “as a matter of law”, but that MJP would have had to establish that there was a loan relationship between Carat and MJP, and no evidence for this had been put to the Tribunal. 
93.	We agree that assignments are effective to transfer loan relationships, under paragraph 12 Schedule 9 of FA 1996. And, as explained above, we found that Aegis’s debt to Carat had been assigned to MJP.  
94.	However, we agree with Mr Ewart that, to bring itself within the loan relationship provisions, MJP would have to show that the loan assigned from Carat to MJP was itself a loan relationship, and no evidence to this effect was presented to the Tribunal. 

Other contentions 
95.	Mr Goldberg raised a number of other contentions, which we have brought together here:
(a)	That the loan relationship rules require only that there be a “lending of money”, and there is no need for cash to pass from one party to another. 
We agree with this, as far as it goes, but it doesn’t go very far. He has to show in what way, absent cash, there has been a lending of money.
(b)	That CIR v HIT Ltd [2007] HKCU (unreported) is authority for the proposition that:
	 “if the parties have themselves said ‘I am a borrower’ and ‘I am a lender’…the court will be at least very very reluctant to go behind it and say, “No you were not.” 
Mr Ewart contended that the intention of the parties could not change the reality. Ramsden v IRC (1957) 37 TC 619, for example, decided that that where an asset is sold and the purchase price is left outstanding, there is no lending of money; mere agreement between the parties would not have transformed it into a loan. We agree.

We also do not read CIR v HIT as authority for discouraging a court from looking behind a label. Section 81 requires a “lending of money”; this is a question of fact to be established by this Tribunal. Section 81(3) provides a statutory exception, under which the issue of an instrument of security establishes a loan relationship, but both sides agree that this subsection is not in point here. 

(c)	That the £6.1m transaction would not have been prevented from being a loan relationship simply because Carat paid £6.1m to Aegis on the instructions of MJP, rather than MJP paying it directly. 
We agree, but again, given our conclusions on the other issues, this does not get MJP home.
96.	For the reasons set out above, we thus find in favour of HMRC on the first argument. This is sufficient to dispose of the issue, but we have gone on to consider the second argument.
The second issue : did the waiver give rise to an allowable debit within the meaning of section 84?

97.	Section 84 is the first of the computational provisions in the “Loan Relationships” code.  It follows the charging section, section 80(1), under which “all profits and gains arising to a company from its loan relationships” are to be “chargeable to tax as income”.  (For present purposes we take as the loan relationship the £6,893,977 owed to MJP by Aegis immediately before the waiver.)  Section 84 prescribes the debits and credits to be brought into account.  These are, in principle, the sums which in accordance with an authorised accounting method and when taken together, fairly represent, for the accounting period and as regards the loan relationship in question, “all profits, gains and losses … or interest … charges and expenses”.  Section 84(7) states that the section has effect subject to Schedule 9.

98.	Section 85 (see paragraph 20 above) specifies, inter alia, the “accruals basis of accounting” as an authorised accounting method.  Among the several conditions for authorisation is the condition, in subsection (2)(b), which states that the basis of accounting is to make “proper provisions for allocating payments under a loan relationship to accounting periods”.  The relevant provision is in subsection (3)(c): this is “provision which assumes, subject to authorised arrangements for bad debt, that, so far as any company in the position of creditor is concerned, every amount payable under the relationship will be paid in full as it becomes due.”

99.	At that stage in the loan relationships code the assumption is directed at bringing payments and payables into the correct accounting periods for purposes of section 84(1).  Section 85(3)(c) links into Schedule 9 where paragraph 5 deals with “bad debt etc” in general.  Paragraph 5 contains the rules for determining the credits and debits to be brought into account.  Paragraph 6 covers situations where debtors and creditor under the loan relationship are connected.  The basic rule is in paragraph 5(1) and is subject to paragraph 6.  This is that for bad and doubtful debts and for liabilities that have been released the relevant accruals basis of accounting may, subject to paragraph 6, depart from the assumption “in the case of the creditor relationship of” the company in question that every amount payable under those relationships will be paid in full as it becomes due.  

100.	To revert to the facts, the position at the start of the 2004 accounting period was that Aegis owed MJP £6,815,365.  On 26 March MJP and Aegis entered into the Deed of Waiver which stated that MJP released Aegis from £6,704,000 of the amount then owed.  That left Aegis still owing £189,977 to MJP.  MJP brought a debt of £6,690,000 into its accounts for the period in respect of the waiver.

101.	MJP, the company in the “creditor relationship”, accepts that it falls within the scope of Schedule 9 paragraph 6 and consequently that, if there has been any departure from the relevant assumption in relation to the debt, it will not be entitled to a debit in respect of the amount covered by the waiver.  But they say that there has been no departure from the relevant assumption.  In determining “every amount payable under the relationship”, the relevant amount payable under the loan relationship falls to be determined at the date to which the accounts are drawn up.  Thus in determining whether or not MJP complied with the assumption, the critical question is whether, in drawing up its accounts to 31 December 2004, MJP assumed that every amount payable under its loan relationship with Aegis would be paid in full as it fell due.  The answer must be, said Mr Goldberg for MJP, that it did.  Because at the accounts date the amount payable under the loan relationship was £189,977, the case for MJP is that it has not departed from the relevant assumption that every sum payable under the loan relationship will be paid as it falls due; after the waiver the facts have changed and £189,977 is the only amount payable and that “inconvenient truth” (to use Mr Goldberg’s words) cannot be ignored.  The position is no different than would have been the case had Aegis paid off the £6,704,000 rather than waived it.

102.	It is, as noted above, common ground that even if the debt of £6,893,977 were a loan relationship, there could by virtue of Schedule 9 paragraph 6(3) be no departure from the assumption that “every amount will be paid in full”.  HMRC through Mr Ewart say that those statutory words postulate a continuing assumption that every amount payable under the particular loan relationship will be paid in full, subject to the “authorised arrangements for bad debt”.  

103.	We are not persuaded by the argument for MJP.  The “assumption” spelt out in paragraph 5(1), i.e. “that every amount payable” under those relevant loan relationship “will be paid in full as it becomes due”, has, instead of being disapplied (as would have been the case at paragraph 5(1) operated), been reinstated by paragraph 6(3).  The assumption is reinstated for the purposes of determining the value of the credits, i.e. MJP’s credits, requiring any release or waiver to be ignored.  The function of the assumption is not confined to its role in section 85(3), i.e. to allocate payments to the periods to which they relate.  MJP’s argument overlooks the wider purpose of the words of the assumption.  Those words apply, as already observed, to both the allocation of the amounts payable to accounting periods and to the quantification of such amounts.  In both respects they are made (by section 85(3)(c)) “subject to authorised arrangements for bad debt”, i.e. Schedule 9 paragraphs 5 and 6.  Thus, in allocating the amount of the loan relationship (i.e. the £6,815,365, which is the amount that would have existed in the absence of the waiver) to the 2004 accounting period, the waived amount (£6,704,000) is assumed to be still payable.

104.	The point can be illustrated by the following example given by Mr Goldberg in the course of argument.  If A owes B £1,000, the amount owing can be reduced to £950 by paying back £50 or by B releasing A from £50 of the debt.  In both cases, the amount payable is reduced from £1,000 to £950.  If B then brings the loan relation into account at £950, there is (observes Mr Goldberg) no departure in either case from the Section 85(3)(c) assumption.  In a sense, the debt is released in both cases.  We see it differently.  The answer is that the paying back of the £50 actually satisfies the requirement of the assumption.  This is because the £50 has been paid back in full, consequently the assumption does not require the £50 to be treated as an amount to be paid back.  By contrast, where B releases A from £50 of the debt, then Schedule 9 paragraph 6(3)(c) applies to substitute the release or waiver of £50 with the assumption that the £50 will be paid in full.

105.	Our view is reinforced when the consequences of MJP’s interpretation of the relevant provisions are examined.  MJP’s interpretation has the effect of rendering paragraph 5(1)(c) of Schedule 9 unnecessary and redundant.  If the words in that provision were necessary for unconnected parties to take account of a “release” (or waiver), then in the absence of that provision the release would not permit a departure from the assumption that every amount payable under a given loan relationship would be paid in full as it became due.  
106.	Moreover, MJP’s construction produces a result, of which the present is an example, which defies the purpose of paragraph 6(3) of Schedule 9.  That provision, which is directed at loan relationships existing between connected persons must have been installed to limit the circumstances in which the release of a liability between connected parties could give rise to either a credit or a debit for the purposes of the loan relationships provisions.  The function of paragraph 6(3) of Schedule 9 was to ensure that, in the absence of the specific circumstances of paragraph 6(4) of Schedule 9, no departure from the assumption that every amount payable would be paid in full as it became due in the current circumstances (where the amount owing under a loan relationship has been released or waived in part).  We are therefore against MJP on the second issue.

Conclusion

107.	For the reasons given above we dismiss MJP’s appeal.  We award the Respondents an amount equal to their costs of the appeal.

108.	This is a full reasoned decision.  The Appellants are informed that they have the opportunity of applying for permission to appeal to the Upper Tribunal.  

SIR STEPHEN OLIVER QC

              RELEASE DATE: 1 July 2010