Judgment summary
This is an appeal by Nicholas Powell against a decision of the First-tier Tribunal (Tax Chamber), issued on 9 May 2025, which dismissed his appeal against a closure notice issued by HMRC (1).
The closure notice concluded that Mr Powell was liable to income tax under section 415 Income Tax (Trading and Other Income) Act 2005 on the basis that a loan made to him by a close company, Thermoline Limited, had been released (1), (11).
The Upper Tribunal (Judge Thomas Scott and Judge Guy Brannan) heard the appeal on 28 July 2026 and dismissed it, applying the principles established in Collins v Addies (54).
Background
Thermoline Limited is a close company under section 439 Corporation Tax Act 2010. Mr Powell was a director and, prior to 2 July 2020, the sole shareholder, making him a participator under section 454 CTA (10(1)).
On 2 July 2020, following a share for share exchange, Property Holding SW Limited (PHSW) became the holding company of Thermoline, with Mr Powell also a director of PHSW (10(2)).
Thermoline advanced sums to Mr Powell. The director's loan account stood at £309,338 on 31 March 2020 and £512,713.89 on 31 December 2020 (10(3)). Thermoline was liable to a section 455 CTA charge in each relevant year (10(4)).
On 16 March 2021, Mr Powell, Thermoline and PHSW entered into a Novation Deed, deemed to take effect from 31 December 2020, under which Mr Powell's liability for the outstanding sums was transferred from Thermoline to PHSW (10(5)).
Thermoline claimed and was granted section 458 CTA relief for the balance to 31 March 2020, repaid on 9 November 2022. HMRC accepted that no tax fell due in respect of sums advanced between 31 March 2020 and 31 December 2020, on the basis that the Novation Deed released those sums (10(6)).
Mr Powell's tax return for the year ended 5 April 2021 was filed on the basis that he had received no deemed dividend income in respect of the sums covered by the Novation Deed (10(7)).
On 9 March 2023, HMRC issued a closure notice concluding that Mr Powell was liable to income tax under section 415 on a deemed dividend payment of £512,713.89 received from Thermoline, resulting in an amendment to his return of £194,580.60 (11). There was no dispute as to quantum, calculation, or procedural validity of the closure notice; the only issue was whether there had been a 'release' of the loan (12).
Core dispute
The central issue was whether the Novation Deed, under which Thermoline released Mr Powell from his loan obligation while PHSW assumed an equivalent obligation to Thermoline, constituted a 'release' of the debt within the meaning of section 415(1) ITTOIA, triggering an income tax charge treated as dividend income under section 416 ITTOIA (6), (7), (12).
The parties relied heavily on Collins v Addies, comprising the High Court decision ([1991] STC 445) and the Court of Appeal decision ([1992] STC 746), which concerned the predecessor provision, section 287 Income and Corporation Taxes Act 1970 (13).
Mr Powell argued, through five grounds of appeal, that the FTT had misconstrued and misapplied Collins, failed to adopt a purposive construction of section 415, and reached conclusions inconsistent with its own findings of fact, including that the novation involved a substitution of creditor (PHSW for Thermoline) rather than a substitution of debtor as in Collins, and that he had obtained no economic benefit from the arrangement (25), (26).
Court findings
The Upper Tribunal held that Collins CA was binding precedent and derived six principles from it: a release need not be voluntary or for less than full value; a release can arise regardless of depletion of the company's assets; repayment of a loan is not a release; repayment can be effected by a third party or by accepting something of equal value; however, repayment does not extend to a situation where one debt is replaced by another (a novation); and the novation limitation is not excluded merely because a new creditor or debtor is involved (30).
Applying these principles, the Tribunal found that Thermoline released Mr Powell from his loan (per clauses 3.1(a), 3.3(b) and 4(a) of the Novation Deed), PHSW simultaneously assumed an equivalent debt to Thermoline recorded on inter-company loan account, and the arrangements were effected by way of novation (33).
The Tribunal rejected Ground 1, finding that Nourse LJ's references to 'something equivalent' to repayment concerned payment in kind or by a third party, not consideration in the form of a replacement debt (36)-(38).
Ground 2 was rejected because the substitution of creditor, rather than debtor, did not alter the core Collins analysis: the debt was released, by novation, and was not repaid (39).
On Ground 3, concerning purposive construction, the Tribunal accepted this caused 'some concern' but concluded that Collins did not treat taxation of an extraction of value by the participator as the underlying purpose of the legislation; the focus was on whether the participator's legal obligation had been released and whether the company was enabled to recover its money (42)-(49).
Grounds 4 and 5 were also rejected: the presence of valuable consideration for the release did not preclude a release under section 415, and the FTT's reasoning at [42]-[43] was properly understood as applying the Collins principles despite factual differences (50)-(52). Subsidiary arguments regarding Esprit Logistics Management Ltd v HMRC [2018] UKFTT 0287 (TC), the legal effect of novation, and HMRC guidance did not alter the conclusion (53).
Outcome
The Upper Tribunal held that, on the binding authority of Collins v Addies, the FTT reached the right decision. The appeal was dismissed (54).
Major issues / areas of contention
- Whether a novation of a close company loan, under which a new creditor assumed an equivalent debt, constituted a 'release' within section 415(1) ITTOIA 2005
- Whether the principles in Collins v Addies, concerning substitution of debtor, applied equally to a substitution of creditor
- Whether a purposive construction of section 415 required an economic benefit to the participator before a tax charge could arise
- Whether the presence of valuable consideration for the release of the debt meant the debt had been repaid or satisfied rather than released
- Whether the FTT's reasoning at paragraphs 42 to 43 of its Decision disclosed an error of law