Judgment summary
Grand Smile Design Limited appealed against a PAYE determination and related National Insurance Contributions decisions concerning the loan charge under schedule 11 to the Finance (No.2) Act 2017. The charge arose from 'quasi-loans' that the appellant's directors, Dr Thomas Keppel and Dr Priyangika Suaris, owed to an employee benefit trust following their participation in the Qubic Gold Bullion Scheme in 2014 and 2015 (paras 1-6).
Following a review, HMRC accepted that Dr Suaris had fully repaid her quasi-loans, and that Dr Keppel had reduced his outstanding balance to £386,838.24, described as 'the disputed balance' (paras 6-7). The appellant contended that Dr Keppel repaid this disputed balance in full before 5 April 2019 through arrangements known as the Qubic Loan Cleanse Scheme (QLC scheme), involving the trust borrowing money to purchase 32 shares in the appellant from Dr Keppel, and Dr Keppel using the sale proceeds and a further payment to discharge the balance (paras 8-9).
HMRC disputed that these arrangements amounted to a 'payment made in money... by way of repayment' within paragraph 11(4)(b) of schedule 11, and argued alternatively that any such payment was excluded by the anti-avoidance provision in paragraph 12 (paras 9, 18-21). The Tribunal considered extensive documentary and witness evidence regarding the implementation of the QLC scheme, including loan agreements with an associated finance company, Delta Multiplex Finance Limited, share valuations, and the circular movement of funds (paras 24-79).
Background
The appellant, incorporated in 2009, provides dental services and at all material times had two directors, Dr Keppel and Dr Suaris (paras 24-26). In 2014 and 2015 the directors entered into the Qubic Gold Bullion Scheme, a form of disguised remuneration arrangement, resulting in them owing 'quasi-loans' to the Grand Smile Design Limited Employee Trust 2014 of £500,000 (Dr Keppel) and £250,000 (Dr Suaris) (paras 3, 31-36).
In 2017 Parliament introduced the loan charge under schedule 11 to the Finance (No.2) Act 2017, taxing quasi-loans outstanding at the end of 5 April 2019, subject to relief for genuine repayments made in money before that date, unless connected with a tax avoidance arrangement (paras 4-5, 17-21).
Faced with the loan charge, Dr Keppel and Dr Suaris decided to repay their debts to the trust rather than pay the loan charge or settle with HMRC (paras 37-40). Dr Suaris repaid her debt using personal savings and family funds. Dr Keppel, lacking sufficient cash, implemented the QLC scheme, under which the trust borrowed £324,480 (later reduced from an initial £478,608 due to FCA share ownership restrictions) from Delta Multiplex Finance Limited to purchase 32 shares in the appellant from him, with the proceeds used to reduce the disputed balance, and he separately paid £38,358.24, described as a lending fee, which was also said to reduce the balance (paras 40-73).
Core dispute
The parties agreed that Dr Keppel owed £500,000 of quasi-loans and that the sole issue was whether the disputed balance of £386,838.24 was 'outstanding' immediately before the end of 5 April 2019, within the meaning of paragraph 1(1)(c) and paragraph 11(4)(b) of schedule 11 (paras 16, 110).
The appellant argued that paragraph 11(4)(b) is a self-contained computational provision using precise legal concepts of 'payment' and 'money', so that the payments of £324,480 and £38,358.24 made by Dr Keppel answered the statutory description of repayment, and that any anti-avoidance concern was to be addressed solely under the separate provision in paragraph 12, which on the appellant's case was not met because Dr Keppel had genuinely suffered the economic consequences intended by Parliament (paras 115, 118, 120).
HMRC argued that paragraph 11(4)(b) must be construed purposively in light of the anti-avoidance purpose of schedule 11, that the QLC scheme involved a circular, pre-ordained movement of the same £324,480 between associated entities without Dr Keppel ever really receiving or losing money, that the share transfer was in substance a payment in kind rather than money, and that the £38,358.24 was in reality a fee for use of the scheme rather than a repayment. HMRC further argued that, if paragraph 11(4)(b) were otherwise satisfied, paragraph 12 excluded the payments because they were connected with a tax avoidance arrangement (paras 116-117, 119).
Court findings
The Tribunal held that the purpose of paragraph 11 is to remove the tax-free benefit of a quasi-loan only where the debtor genuinely suffers an economic disadvantage in money terms in discharging it, and that a purposive approach requires the QLC scheme to be viewed as a composite whole rather than as isolated legally discrete steps (paras 125-129).
Applying that approach, the Tribunal found that Dr Keppel did not make a 'payment made in money... by way of repayment' of the disputed balance to the extent of £324,480. The transfer of the 32 shares to the trust was, in substance, a payment in kind, effectively a gift, because the trust incurred no real economic cost in acquiring the shares, the borrowed funds were self-cancelling, and the money passed through Dr Keppel only fleetingly and notionally (paras 130-131).
The Tribunal also found that the payment of £38,358.24 was not a repayment of the disputed balance but was, in reality, a fee for the use of the QLC scheme paid to entities associated with Qubic, given the absence of evidence of any commercial lending fee at that rate, the association between Delta and the trustee, and the discrepancy with the fee structure referred to in Qubic's advice letter (paras 130-131).
The Tribunal further held that, if paragraph 11(4)(b) had otherwise been satisfied, paragraph 12 would have applied to disregard both payments because they were connected with a tax avoidance arrangement, Dr Keppel's main purpose being to avoid the loan charge without the economic detriment in money terms that the legislation required (paras 132-133).
Outcome
The Tribunal decided that the disputed balance of £386,838.24 was outstanding for the purposes of schedule 11 at the end of 5 April 2019 and therefore constituted employment income of Dr Keppel subject to income tax and National Insurance Contributions under Part 7A of the Income Tax (Earnings and Pensions) Act 2003 and related provisions (para 23).
The appeal was dismissed (para 134).
Major issues / areas of contention
- Whether payments made under the Qubic Loan Cleanse Scheme constituted a 'payment made in money... by way of repayment of the initial debt amount' under paragraph 11(4)(b) of schedule 11 to the Finance (No.2) Act 2017.
- Whether the transfer of shares in the appellant to the employee benefit trust, funded by a circular loan from an associated finance company, amounted in substance to a payment in kind rather than a payment in money.
- Whether the sum of £38,358.24 paid by Dr Keppel was a genuine repayment of the disputed balance or, in substance, a fee for use of the QLC scheme.
- Whether the anti-avoidance provision in paragraph 12 of schedule 11 operated to disregard the payments as connected with a tax avoidance arrangement.
- The correct application of the purposive, Ramsay-based approach to statutory construction of tax avoidance legislation, including whether a composite or step-by-step analysis of the transactions was required.