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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Powell v Revenue and Customs (INCOME TAX - section 415 Income Tax (Trading and Other Income) Act 2005 - whether, pursuant to deed of novation, there had been a release or repayment of participator loan) [2025] UKFTT 528 (TC) (09 May 2025) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2025/TC09518.html Cite as: [2025] UKFTT 528 (TC)

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FIRST-TIER TRIBUNAL
TAX CHAMBER

		Taylor House, London
		Heard On: 29 and 30 April 2025 Judgment Date: 9 May 2025

INCOME TAX – section 415 Income Tax (Trading and Other Income) Act 2005 - whether, pursuant to deed of novation, there had been a release or repayment of participator loan – appeal REFUSED DECISION

Introduction

1. This appeal is made by Nicholas Powell (Appellant) pursuant to section 31 Taxes Management Act 1970 (TMA) against the conclusion contained in a closure notice issued by HM Revenue & Customs (HMRC) on 9 March 2023 under section 28A(1B) and (2) TMA. HMRC concluded that the Appellant was liable to a charge to income tax arising under section 415 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) on a deemed payment of dividend in the sum of £512,713.89 received from Thermoline Limited (Thermoline). The amendment to the Appellant's 2020/21 tax return consequent upon that conclusion was £194,580.60.
2. There is no dispute between the parties as to the quantum or calculation of the amendment or as to the procedural validity of the closure notice.
3. The issue we had to decide was a discrete and seemingly simple one that, in the end, was significantly more complex than first appeared. For the reasons set out below we have refused the appeal.

Agreed facts

4. There was no dispute as to the facts which we find as follows:

(1) Thermoline is a close company under section 439 Corporation Tax Act 2010 (CTA) which was incorporated on 13 February 1989 (then under the name Astormere Limited). During the tax year ended 5 April 2021 and on a continuing basis the Appellant was a director of Thermoline. Prior to 2 July 2020 the Appellant was the sole shareholder. The Appellant therefore meets the definition of participator in section 454 CTA.

(2) On 2 July 2020 following a share for share exchange Property Holding SW Limited (PHSW) became the holding company of Thermoline. During the tax year ended 5 April 2021 and on a continuing basis the Appellant was a director of PHSW.

(3) Thermoline incurred expenditure on behalf of and/or advanced sums to the Appellant. The sum outstanding on the director's loan account on 31 March 2020 was £309,338. Further indebtedness arose in the accounting period ended 31 March 2021 and the sum outstanding on 31 December 2020 was £512,713.89.

(4) Thermoline was liable to a charge to corporation tax under section 455 CTA in each tax year in which his indebtedness to Thermoline increased to tax year ended 5 April 2021.

(5) We have no evidence as to the motivation or context prompting it but on 16 March 2021 the Appellant, Thermoline and PHSW entered, by way of deed, a novation of the sums outstanding on the director's loan account (Novation Deed). The terms of the Novation Deed (which we address below) were that the novation itself was deemed to take effect on 31 December 2020 and that the Appellant continued to have a liability in respect of the sums to PHSW rather than Thermoline.

(6) Thermoline claimed and was granted relief in respect of the section 455 CTA charge under section 458 CTA as regards the balance to 31 March 2020. Such relief was repaid on 9 November 2022. HMRC accepted that no tax fell due in respect of the sums advanced in the period from 31 March 2020 to 31 December 2020 on the basis that in consequence of the Novation Deed the sums so advanced had been released (as per the claim to that effect dated 10 February 2022) by Thermoline on 31 December 2020 and thereby within 9 months of the year end.

(7) The Appellant rendered his tax return for the tax year ended 5 April 2021 on the basis that he had received no deemed payment of dividend income in respect of the sums which were the subject of the Novation Deed.

Relevant law

5. The principal provision with which we are concerned is section 415(1) ITTOIA. It provides:

Charge to tax under Chapter 6

(1) Income tax is charged if–

(a) a company is or was chargeable to tax under section 455 of CTA 2010 (loans to participators in close companies etc.) in respect of a loan or advance, and

(b) the company releases or writes off the whole or part of the debt in respect of the loan or advance.

6. Section 416 ITTOIA brings the sum identified in section 415 CTA into the charge to tax treating it as income. It is charged as dividend income pursuant to section 19 Income Tax Act 2007.
7. Also relevant are section 455 and 458 CTA. Section 455 provides that where a close company makes a loan or advances money to a participator there is due from the company an amount as if it were an amount of corporation tax on the company for the accounting period in which the loan is made of an amount equal to the upper dividend rate. The amount charged under section 455 is relieved under section 458 when and if the underlying loan or advance is "repaid", or "released or written off".

Collins v Addies

8. The parties were agreed that the principal authority which we must apply when determining this appeal is that of Collins v Addies (Inspector of Taxes) [1992] STC 746 (and as it approves the analysis of the High Court [1991] STC 445) (Collins).
9. A full understanding of the facts of the case are relevant to the matter we have to determine. Mr Collins and Mr Greenfield were participators in a close company, and both were indebted to the company; the total debt was £79,000. Mr Brent was also a shareholder. The shares held by Mr Collins and Mr Greenside were transferred to Mr Brent and the three men and the company entered into an agreement regarding the outstanding indebtedness. The terms of that agreement provided:

"2. In consideration of the covenant by [Mr Brent] hereinafter contained the Company hereby releases and discharges [Mr Collins and Mr Greenside] from all liability to repay to the Company the Current Accounts (insofar as the same does not exceed £ 68,000) and from all actions claims proceedings and demands in respect thereof (up to the said sum of £68,000).

3. In consideration of such release and discharge [Mr Brent] hereby covenants with the Company that he will henceforth assume liability for and pay and discharge the Current Accounts due and owing to the Company by [the taxpayers] (insofar as the same does not exceed £68,000) and the Company hereby accepts [Mr Brent] as debtor up to the said sum of £68,000 in place of [Mr Collins and Mr Greenside]."

10. As to the balance, Mr Collins and Mr Greenside paid Mr Brent £11,000 and Mr Brent in turn settled that portion of the outstanding sum.
11. The issue to be determined initially by the Special Commissioner was whether the provisions of the agreement gave rise to a charge under section 287 Income and Corporation Taxes Act 1970 which is relevantly now section 415 ITTOIA. The Special Commissioner determined that the release provided under the agreement fell squarely within the terms of section 287 and there was appropriately a charge to income tax on both Mr Collins and Mr Greenside as to their proportionate share of the £68,000 indebtedness from which they were released.
12. Millett J, (as he then was) refused the taxpayers appeal from the Special Commissioner in the following terms:

"Under the terms of the deed the company released the taxpayers from liability on their respective current accounts … in consideration of the substitution of Mr Brent for the taxpayers as a debtor to the company in that amount^[1].

…

… A novation discharges the legal obligation of the original obligee and replaces it by a new obligation of a new obligee. It does not merely substitute a new debtor for the old in respect of the same debt or liability because as a matter of law it is not possible for a debtor to assign a legal liability. … As a matter of law, that undoubtedly constitutes a release from the old debt and its repayment by an entirely new debt owed by Mr Brent.

But that is not the end of the case because the next argument of counsel for the taxpayers is that the word 'releases' must mean the discharge of a debt otherwise than by payment or satisfaction. If the creditor accepts payment from a third party in satisfaction of the debtor's liability that would clearly constitute the repayment of the debt, and not the release of the debt. The debt is discharged by payment and not release. Again, if a creditor accepts something of equal value, whether from the debtor or a third party, that would equally constitute a discharge of the debt; it would be discharged by satisfaction rather than payment, but not by release. Again, that would not give rise to a tax charge. Payment in kind from the debtor himself or payment by a third party on behalf of the debtor would bring the liability to an end by repayment or satisfaction and not release. The Crown rightly accept both contentions.^[2]

…

… In my judgement, [ss455/458 CTA^[3] and s415 ITTOIA] draw a clear distinction between the release or writing off of the debt on the one hand and its repayment or satisfaction on the other. While payment by a third party on behalf of the debtor, or payment in kind by the debtor himself or by a third party, accepted in full discharge of the debt may well constitutes repayment or satisfaction and not a release for the purpose of these sections, I do not consider that the substitution of a fresh promise to pay by a third party can be similarly treated. A promise to pay by a new debtor constitutes valuable consideration and may properly be accepted by the company in substitution of the debt of the original obligee, but as a matter of ordinary usage would not be regarded as payment. In my judgement there is a clear distinction to be drawn between a novation which involves the release of one debt and the substitution of another, and all other forms of payment or satisfaction under which the debt is treated as repaid with no outstanding obligation on any party in respect of the debt or similar sum."^[4]

13. On appeal to the Court of Appeal the Court noted that the code for charge to corporation tax and associated relief (i.e. those provisions now in sections 455 and 458 CTA) and the charge to income tax under (what is now section 415 ITTOIA) are separate but associated codes for taxation. In this context the Inland Revenue contended that the income tax charge arising under what is now section 415 ITTOIA applied to any release that arose neither from repayment nor satisfaction (by way of valuable consideration in kind) of the debt^[5].
14. Nourse LJ accepting Millett's analysis and the Inland Revenue's interpretation of the application of the income tax charge determined:

"The Crown's basic proposition, with which I agree, is that 'release' does not include any transaction which either consists of or amounts to a repayment of the loan, even if the transaction, when viewed in isolation, might be said to have the effect of releasing the debtor from his obligation to repay the loan. The reason for that limitation is that the repayment of the loan, or the acceptance by the company of something equivalent to it, effectively enables it to recover its money, in which event there is no justification for imposing a liability to tax on the participator. The limitation has nothing to do with gratuitousness. Moreover, it is not one which excludes a novation, being a transaction which does not enable the company to recover its money."

Deed of novation

15. Critical to the determination of this appeal is the interpretation of the legal effect of the deed of novation (Novation Deed) entered on 16 March 2021 between the Appellant, Thermoline and PHSW. The relevant terms we need to interpret provide:

"BACKGROUND

(A) [Thermoline] is the lender under a loan with [the Appellant] (Loan)

(B) [Thermoline] has advanced monies to [the Appellant] under the Loan which … are outstanding at the date of this deed.

(C) This deed sets out the terms and conditions on which the parties agree [Thermoline] will transfer by novation all of its rights and obligations under the Loan to [PHSW].

Agreed terms

1. Definitions and interpretation

Debt: the principal amount of £512,713.89 … owing by [the Appellant] to [Thermoline] under or in connection with the Loan which are outstanding at the Novation date.

Novation Date: the 31 December 2020

Payment Amount: the amount specified in the Payment Letter to be paid by [PHSW] to [Thermoline] (or left outstanding on inter-company loan account between [Thermoline] and [PHSW]) on the Novation Date in consideration of the novation to be effected under this deed.

Payment Letter: a letter from [Thermoline] to [PHSW], substantially in the form set out in Schedule 1, referring to the novation to be effected under this deed and specifying, amongst other things, the Payment Amount.

…

3. Novation

3.1 The parties agree that on and from the Novation Date:

(a) subject to clause 3.3 [Thermoline] irrevocably and unconditionally releases [the Appellant] from all [the Appellant's] obligations under the Loan, … including its obligation to repay the Debt to [Thermoline] and [Thermoline's] rights against [the Appellant] shall be cancelled;

(b) [the Appellant] irrevocably and unconditionally releases [Thermoline] from [Thermoline's] obligations under the Loan, … and the Appellant's rights against [Thermoline] shall be cancelled;

(c) subject to clause 3.3 [PHSW] shall acquire rights, title, interest and benefits in and to the Debt and the Loan which are identical in character to the entire rights, interest and benefits in and to the Debt and the Loan which [Thermoline] had;

(d) [PHSW] undertakes to perform obligations toward [the Appellant] under the Loan which are identical in character to the obligations under the Lone which [Thermoline] had; and

(e) [PHSW] shall be substituted for [Thermoline] as a party to and bound by the terms of the Loan.

3.2 [The Appellant] agrees that on and from the Novation Date (an in consideration of the release in clause 3.1(a)) it shall:

(a) repay the Debt; and

(b) subject to clause 3.3, pay … amounts owing in respect of the Loan

In each case to [PHSW] on the due dates in accordance with the terms of the Loan.

3.3 The parties agree that, with effect on and from the Novation Date:

(a) [PHSW] shall set up an inter-group loan account with [Thermoline] in the amount of the Loan; and

(b) [Thermoline] no longer has any rights or recourse in or to any obligations or liability of [the Appellant] in respect of … amounts owing in respect of the Debt accrued up to but excluding the Novation Date.

3.4 On the Novation Date, [PHSW] shall agree to owe the amount of the Debt to [Thermoline] on intercompany loan account in accordance with the Payment Letter.

4. Confirmation and indemnity

[Thermoline] and [PHSW] agree and confirm that with effect on and from the Novation Date:

(a) [Thermoline] no longer has any rights or obligations in relation to the Debt with [the Appellant], but will have rights in relation to the subsequent intra-group debt owed to it by [PHSW] as detailed in clause 3.3(a) above;

…"

16. The Payment Letter, in the form annexed as Schedule 1 was also signed on 16 March 2021 and provided, as far as relevant:

"We refer to the executed deed of novation (Novation Deed) dated 16th of March 2021 under which [Thermoline] has agreed to novate its entire rights and obligations (including in respect of the Debt) under the loan between [Thermoline] and [the Appellant] (Loan) to [PHSW]. …

We write to set the amount of, and arrangements for, the payment of the Payment Amount of £512,713.89 (as at 31 December 2020).

…

The Payment Amount shall be a debt due to [Thermoline] by [PHSW] and shall be recorded as an intra group loan between the companies.

[PHSW] agrees that, once paid, the Payment Amount (or any part of it) payable under this letter will not be refundable under any circumstances. The Payment Amount will not be subject to deduction, counterclaim or set off, or otherwise affected by any claim or dispute relating to any other matter …"

The Issue

17. As indicated, the dispute we must determine is a discrete point, namely: whether the terms of the Novation Deed give rise to the release of the Appellant from his obligations to Thermoline within the scope of section 415 ITTOIA.

Parties' submissions

18. We are grateful to the representatives of both parties in this matter for their skeleton arguments and their willingness to engage with us in robust exploration of their respective cases. We set out below what is necessarily a summary of those cases. Where we do not record a specific nuance of argument that is not to be interpreted as our having not considered the arguments presented to us in full.

Appellant's submissions

19. Mr Redpath's principal contention is that the facts of the present case fall within what Nourse LJ described as the accepted limitation to the scope of section 415 ITTOIA. It is said that the release expressly provided for in clause 3.1(a) of the Novation Deed was made for valuable consideration, namely payment (made by way of inter-company indebtedness) from PHSW for the rights and obligations previously owned by Thermoline in respect of the indebtedness owed by the Appellant.
20. It is contended that there is a material and factual difference between the novation in Collins and the Novation Deed. In Collins Mr Brent was substituted as the debtor to the company in place of Mr Collins and Mr Greenside whereas in this case PHSW was substituted as the creditor in the loan relationship with the Appellant. PHSW had, it is said, agreed to pay full value for Thermoline's rights and obligations as creditor in the loan relationship albeit that the amount that it agreed to pay was recognised in an inter-group loan account rather than paid by way of immediate cash payment.
21. Consistent with the judgement of the High Court in The Argo Fund Ltd v Essar Steel Ltd [2005] EWHC 600 at [61] and the position adopted by Millett J in Collins the effect of the Novation Deed was to bring to an end the loan relationship between the Appellant and Thermoline and replace it with a new loan relationship between the Appellant and PHSW. In addition, and representing full value consideration for the parties entering into that new relationship, additional rights and obligations were created between PHSW and Thermoline pursuant to which sums were outstanding on the inter-group loan account.
22. It was claimed that the terms of the Novation Deed expressly required that the rights and obligations under the loan relationship with the Appellant and Thermoline pass to PHSW in consideration of PHSW's recognition of an amount owing to Thermoline in advance of, and as a condition precedent to, the release granted by Thermoline to the Appellant. Such release representing the natural consequence of the debt owed by the Appellant under the loan relationship having been fully satisfied (or paid) by PHSW by way of the indebtedness accepted under the inter-company loan agreement. In the language used by Nourse LJ the recognition of indebtedness by PHSW was said to amount to repayment or the acceptance of something equivalent to payment by Thermoline.
23. Thus, whilst it was accepted that: Thermoline was a close company, the Appellant was a participator in that close company, and that the loan relationship between Thermoline and the Appellant fell within the scope of the charge to tax under section 455 CTA the release expressed in clause 3.1(a) was not one which was subject to an income tax charge under section 415 ITTOIA.
24. This contention was said to be supported by the analysis of the First-tier Tribunal in Esprit Logistics Management Ltd v HMRC [2018] UKFTT 287 (Espirit). That case concerned tax planning arrangements whereby rather than being paid bonuses, amounts outstanding on director's loan accounts were written off/released. The taxpayers in that case contended that they should be liable to an income tax charge under section 415 ITTOIA at the dividend rate rather than to tax on income from employment under section 62 Income Tax (Earning and Pensions) Act 2003. The Tribunal concluded that having determined a bonus entitlement the means by which the bonus was paid was to release the indebtedness otherwise owed by the directors such that the release was consequent on satisfaction of the debt.
25. The Appellant contends that the Tribunal in that case confirmed that section 415 ITTOIA, as interpreted through Collins, imposed a tax charge in situations in which there had been no repayment or satisfaction of the indebtedness. Where the trigger for the release is a repayment or something equivalent to it which satisfies the debt, no charge should arise. The critical question is therefore whether the close company has received payment or valuable consideration in respect of the debt prior to making the release.
26. When we explored the submissions with Mr Redpath, he emphasised that there was a relevant and material difference between the present case and Collins because it was the right to receive the debt which was transferred. Mr Redpath accepted that the continuation of the Appellant's obligations to PHSW and the fact that ultimately the Appellant had settled his debt to PHSW who in turn but some years later settled its debt with Thermoline was not strictly relevant but did demonstrate that there was a new and unconnected loan relationship which had arisen. The basis of the latter loan relationship being that PHSW had agreed to purchase and thereby satisfy the Appellant's debt.
27. In response to the Tribunal's concern that the Novation Deed was executed on 16 March 2021 with purported effect from 30 December 2020 Mr Redpath explained that the Novation Date had been set to ensure that the increased indebtedness arising between the Appellant and Thermoline in the accounting period to 31 March 2020 had been released within 9 months ensuring that no section 455 CTA charge arose in respect of that sum. He explained that, having an effective date prior to the date of signature was a common situation in commercial agreements, and he asserted that the timing gap did not preclude a conclusion that the establishment of liability on the inter-company loan account on the acquisition by novation of the Appellant's debt represented a condition precedent and thereby valuable consideration for the release.
28. It was denied that the basis on which the Thermoline had claimed relief in respect of the section 455 CTA charge could be determinative of the issue before us. This was on the basis that there was an entitlement to relief whether the Appellant's indebtedness was released, written off or repaid and the terminology adopted by Hazelwoods LLP may simply have been wrong. It was contended that we need to determine the matter on the facts and by interpreting the Novation Deed.
29. When we asked Mr Redpath whether we should properly apply section 415 ITTOIA to the substance of the Novation Deed and by reference to the purpose of the provision identified in Collins he confirmed, in essence, that we should. In his submission, Collins supported a conclusion that section 415 ITTOIA did not require a tax charge where the debt had been repaid or satisfied. Thus, if the substance of the Novation Deed was that the Appellant's debt to Thermoline had been satisfied (as contended) that was the basis on which section 415 ITTOIA should be applied.

HMRC's submissions

30. HMRC contend that the present situation is indistinguishable from Collins. They refer to the clear and unambiguous terms clause 3.1(a) of the Novation Deed which irrevocably and unconditionally released the Appellant from his obligations to Thermoline.
31. It was submitted that section 415 ITTOIA applies at a point in time and specifically to the loan relationship between Thermoline and the Appellant without reference to any continuing obligations owed to PHSW. In that regard it is said that the Appellant was released with PHSW, in substance, stepping into the Appellant's shoes as debtor; the indebtedness of the Appellant on the director's loan account simply being replaced by PHSW's indebtedness on the inter-company loan account. Thermoline had not received any money or equivalent which satisfied the Appellant's debt.
32. Applying the words of Millett J HMRC contend that whilst the agreement by PHSW to take all the rights and obligations by way of novation of the debt in return for the promise to pay may well represent valuable consideration in a contractual sense it does not satisfy the Appellant's indebtedness in a relevant sense merely representing a substituted debt. It was argued that the purpose of section 415 ITTOIA as an anti-avoidance provision is to prevent the extraction of value from a close company by a participator without the payment of income tax. Only where "there is no outstanding obligation on any party in respect of the debt or any similar sum" will the debt have been repaid/satisfied. Otherwise there has simply been a release of the participator. As Nourse LJ put it unless, through the terms and effect of the Novation Deed the close company has been "effectively enabl[ed] to recover its money" there has been no satisfaction of the debt and the section 415 ITTOIA charge applies.
33. HMRC placed reliance on the terms of Hazelwoods LLP's letter of 10 February 2022 as supporting the only real interpretation of the terms of the Novation Deed i.e. that it was a release of the Appellant.
34. As with Mr Redpath the Tribunal was interested to explore the detail of HMRC's case. We asked Miss Marsden what HMRC's position would have been if, rather than establishing the inter-company loan account, PHSW had paid £512,713.89 in cash. She seemed to accept that had the cash been physically received from PHSW HMRC would not have imposed a section 415 ITTOIA charge, we assume on the basis that in such a situation it could viably be said that Thermoline had then recovered its money (in the sense identified by Nourse LJ). We also asked whether the answer would be different if rather than pay immediately an agreed but limited period of credit had been set but that question was not answered.

Discussion

35. As confirmed definitively in Hazelwood Properties Ltd v Rossendale Borough Council [2021] UKSC 16 (Hazelwood) when deciding this case we must interpret section 415 ITTOIA by reference to its purpose (discerned from the statutory context and objectives of parliament) and apply it to the facts determined realistically and looked at in the round (see analysis of historic case law and conclusions drawn in paragraphs 9 – 14 of Hazelwood).
36. Our task in that process is made considerably easier because, as accepted by the Tribunal in Esprit (paragraph 111), Collins very clearly expresses the purpose of section 415 ITTOIA as taxing distributions made by close companies through the releasing (in the ordinary sense of the word) of obligations to repay sums advanced to or otherwise due from participators.
37. From Collins it is also clear that, where a debtor is released from a debt as the natural and ordinary consequence of having repaid or satisfied the debt, section 415 ITTOIA will not apply. Given the purpose of the tax charge, and by reference to the articulated position adopted in Collins, repayment or satisfaction requires that the close company has received full value of the debt in cash or kind from the debtor or a third party by way of satisfaction of the loan such that the close company "recovers its money". The substitution of one repayment obligation for another has clearly been rejected as representing repayment or satisfaction. However, the setting off of equal value and mutual financial obligations between the close company and the participator was accepted as payment and not a relevant release in Esprit (see paragraph 113 and 117).
38. We therefore turn to consider the terms of the Novation Deed:

(1) We note that the "Loan" (Loan) in this case is essentially defined as the relationship of indebtedness between Thermoline and the Appellant. Whilst that relationship is stated to be, and thereby defined as, a loan we were provided with no information as to the circumstances in which it arose or its terms. Whilst interest is referred to in the Novation Deed there is no evidence that the indebtedness bore interest. We also have no information as to the respective rights or obligations arising between the parties. Plainly, there was an obligation on the Appellant to repay the loan. Mr Redpath invited us to imply that such obligation was to repay on demand, and we consider that such implication is at least reasonable. In addition, we consider that we can imply certain obligations on Thermoline as required of them by law, in particular to pay any tax due under section 455 CTA and maintain accurate records of the director's loan account pursuant to section 386 Companies Act 2006. Accordingly, we accept that the loan relationship gave rise to mutual rights and obligations between the Appellant and Thermoline.

(2) Debt is then defined as the principal amount under the Loan (which is specifically identified as £512,713.89) together with interest and fees outstanding on the Loan as at the 31 December 2020 (i.e. the Novation Date). As indicated, we have no evidence that the loan was interest bearing or that any fees were charged. On the facts as presented to us we conclude that despite the definition the amount of the Debt was limited to £512,713.89.

(3) Payment Amount is defined in the Novation Deed. This sum is stated to be the consideration payable for the novation effected under the Novation Deed, but the defined term does not otherwise appear in the Novation Deed and merely serves as a definition for the Payment Letter. The Payment Letter then specifies that the Payment Amount shall be £512,713.89 and expressly excludes interest and fees. The definition and the terms of the Payment Letter provide for payment of the amount to be left outstanding on an inter-company account.

(4) We interpret the provisions of clause 3.1 as the means by which the loan relationship between Thermoline and the Appellant was ended and substituted for a loan relationship on the same terms between PHSW and the Appellant "on and from" 31 December 2020 by release and transfer of all rights and obligations under the Loan and in relation to the Debt:

(a) Pursuant to clause 3.1(a) (and subject to, but not expressly in consideration of, clause 3.3 to which we will come) Thermoline released the Appellant from all obligations under the Loan cancelling its rights against the Appellant.

(b) Similarly, but not conditional on clause 3.3, under 3.1(b) the Appellant released Thermoline from its obligations to the Appellant.

(c) Clause 3.1(c) (again subject to 3.3) provided for the acquisition by PHSW of all rights "in and to the Debt and Loan" previously held by Thermoline.

(d) Under 3.1(d) PHSW took on all obligations under the Loan.

(e) Clause 3.1(e) formally recognised the substitution of PHSW as lender in place of Thermoline.

(5) In consideration for Thermoline releasing the Appellant from his obligations to it the Appellant agreed to repay the Debt to PHSW under clause 3.2(a). 3.2(b) provided that the Appellant agreed to pay interest fees and other amounts owing in respect of the Loan to PHSW. As we have noted we have no evidence that the loan was interest bearing. Clause 3.2(b) was subject to clause 3,3 but clause 3.2(a) was not.

(6) Clause 3.3 is in two parts:

3.3(a) provides that "on and from" 31 December 2020 PHSW will set up an intra-group loan account reflecting that PHSW is indebted to Thermoline in the "amount of the Loan"; and

3.3(b) recognises that Thermoline has transferred its rights of recourse or obligations in respect of any interest or fees or any amounts owing in respect of the Debt accruing up to but excluding 31 December 2020 to PHSW.

(7) As noted above, clauses 3.1(a) (Thermoline's agreement to release the Appellant) and 3.1(c) (PHSW's acquisition of Thermoline's rights and obligations under the loan relationship with the Appellant and the Appellant's agreement to pay interest but not capital to PHSW) were subject to clause 3.3 with PHSW's acknowledged indebtedness to Thermoline of £512,713.89 said to represent the consideration for the Novation Deed.

(8) Clause 3.4 provides that PHSW shall owe Thermoline "the amount of the Debt" on inter-company loan account pursuant to the Payment Letter.

39. Mr Redpath sought to contend that the Novation Deed should be construed as establishing that the Appellant's indebtedness to Thermoline had been satisfied. He said this was achieved as follows:

(1) The inter-company loan arrangements were set up on 16 March 2021 as recognising a liability for payment of £512,713.89 from PHSW as the consideration for the acquisition of the right to collect the sum of £512,713.89 (together with interest, fees etc) outstanding on 31 December 2020 (i.e. the Debt) together with all ongoing rights and liabilities arising on and from 31 December 2020 as the new lender.

(2) The novation of the creditor relationship on the above terms and the Appellant's continued obligations to PHSW representing valuable consideration satisfying the Appellant's liability to Thermoline thereby justifying his release from indebtedness to Thermoline.

40. We have not found the Novation Deed has been easy to construe. However, having carefully considered its terms, we are prepared to accept the contractual effect of the Novation Deed is as set out in paragraph 39 above i.e. under contract valuable consideration was provided both for the acquisition of the rights and obligations under the Loan and relating to the Debt by PHSW from Thermoline and for the release of the Appellant from its indebtedness to Thermoline such that PHSW was substituted as lender to the Appellant. During the hearing we had explored with the Appellant whether its contractual analysis essentially required the £512,713.89 to do double service as consideration. In the end from a contractual perspective we are satisfied that PHSW's obligation to pay (as reflected by the inter-company loan account) represented valuable consideration for the creditor to creditor novation and PHSW's acceptance of all rights and obligations under the Loan as valuable consideration acceptable to Thermoline for the release of the Appellant.
41. However, in light of Collins accepting that contractual analysis does not determine the taxing outcome, Millett J and thereby Nourse LJ accepted that the novation in that case was valid with each party accepting the value of the various releases and assumptions of rights and obligations connected with the debt. We must therefore determine how section 415 ITTOA applies here despite the conclusion that there is valuable consideration for a creditor to creditor novation and consequent release of the Appellant from his loan relationship with Thermoline.
42. Having carefully considered Collins we determine that the release provided for under clause 3.1(a) is a taxable release. We readily acknowledge that the factual matrix in the present appeal differs from that in Collins. In Collins Mr Brent simply stepped into the shoes of Mr Collins and Mr Greenside in respect of £68,000 of their joint indebtedness. In the present case PHSW acquired a liability and, in consequence of the liability being outstanding on an inter-company loan account, PHSW became independently indebted to Thermoline. However, such indebtedness was, in our view, plainly, associated to the indebtedness from which the Appellant was released.
43. Applying the analysis provided by Nourse LJ, including the analysis adopted from Millett it is, in our view, clear that a release will be taxable even where there is valuable consideration in a contractual sense, unless that consideration results in there being "no outstanding obligation on any party in respect of the debt or any similar sum" thereby enabling the party making the release "to recover its money". Only where there is no debt owed by any party can it be said that there has been no distribution by the close company. The close company has not been made whole, as in Collins it has the means by which it may recover the money but has not recovered it. In this regard we see no relevant distinction between substitution of a debtor (as was the case in Collins) and the substitution of the creditor where that substituted creditor does not enable the original creditor to recover its money. In the latter case there remains an outstanding obligation to the original creditor of a similar sum i.e. the value of the novated debt. We do not consider that for the purposes of the "limitation" applied to section 415 ITTOIA a debt can be "satisfied" where the sum remains outstanding. Cash or physical assets may satisfy the indebtedness but not a right to call on another in connection with the debt.
44. We accept that the contractual analysis demonstrates that the parties provided valuable consideration as between PHSW and Thermoline for the novation, substituting PHSW as creditor in the loan relationship with the Appellant. However, in financial terms Thermoline had not recovered its money and there remained an outstanding obligation from PHSW of the precise amount from which the Appellant had been released by Thermoline. In that sense there was substitution of one debtor for another. Further, we do not consider that the PHSW's liability to Thermoline could be said to satisfy the debt owed by the Appellant. It arose in consequence of an associated transaction (the transfer of a bundle of rights and obligations to PHSW). The fact that having sold its interest in the Loan to PHSW, Thermoline had no right to pursue the Appellant does not mean that the debt was satisfied. As in Collins it had been substituted for equivalent value by way of an alternative debtor. Thus, on both 31 December 2020 and 16 March 2021 the amount of £512,713.89 remained outstanding to Thermoline with the consequence that Thermoline did not recover its money,thereby squarely meeting the conclusion in Collins.
45. We note that in reaching our conclusion we have placed no reliance on the language used by Hazelwoods LLP in their letter of 10 February 2022 making the claim for relief in respect of the s455 CTA charge. However, had we needed to have done so, whilst we accept that Hazelwoods LLP may have been incorrect in their view, we consider the precise language used by them, limiting the basis for relief to a release when section 458 CTA applies to either release or repayment, is at least indicative that the parties considered or were at least advised that the Novation Deed gave rise to a release and not a repayment.

Disposition

46. For the reasons stated we find that the Appellant was released from his indebtedness to Thermoline, a close company of which he was a participator, in circumstances in which section 455 CTA had applied in respect of the advance made to him, with the consequence that HMRC were correct to conclude that section 415 ITTOIA applied.

Right to apply for permission to appeal

47. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.
Release date: 09^th MAY 2025

Note 1   At p450f. It then being noted that such outcome was reflective of the parties stated intent in the recitals to the agreement (see page 451a-b)    [Back]

Note 2   At p453e-h    [Back]

Note 3   It being noted that under the equivalent of section 458 only provided for relief on repayment and not on release or write off    [Back]

Note 4   At p454e-g    [Back]

Note 5   At p749e -9g    [Back]