Loan relationship

A group of companies took part in a tax avoidance scheme.

One firm lent money to another under terms that no interest was payable while the loan was outstanding but irredeemable preference shares equal in value to a commercial rate of interest on the loan were to be issued to a third company.

The money lender and share recipient maintained that neither was liable for tax on the interest or its equivalent.

HMRC disagreed and the businesses appealed.

The First-tier Tribunal found the shares were taxable income of the recipient business under TA 1988 s 18 but the lender was not taxable on the value of the shares (TA 1988 s 786(5)).

Both the share recipient and the Revenue appealed.

The Upper Tribunal held that TA 1988 s 786(1) was worded to catch an arrangement for the lending of money regardless...