MJP Media Services Ltd v HM Revenue and Customs

For corporation tax purposes, a debt is a loan relationship only where it arises from a transaction for the lending of money. The court must identify and characterise the transaction that created the debt. Ledger entries, an inter-company balance and a later agreement labelled as a loan do not necessarily establish that character. A later document cannot retrospectively alter the character of earlier transactions. On a second appeal, factual findings can be disturbed only for an error of law in the Edwards v Bairstow sense, as stated in [1956] AC 14. Findings that payments went to a third party and that an existing debt was assigned, rather than new money being lent, were open to the tribunals. A new argument that the later agreement itself created a loan relationship was refused where it had not been raised below and required further factual investigation.

MJP claimed a £6,690,000 corporation tax deduction as a loan relationship debit under Chapter II of Part IV of the Finance Act 1996. HMRC disallowed the deduction on the basis that no loan relationship existed in respect of inter-company transactions involving Aegis. The First-tier Tribunal dismissed MJP’s appeal, finding that the evidence did not establish qualifying lending. The Upper Tribunal dismissed MJP’s appeal on a point of law. The Court of Appeal considered whether those factual conclusions were legally or perversely erroneous, whether a later Inter Group Loan Agreement changed the analysis, and whether that agreement could itself establish a new loan relationship.

The Court of Appeal unanimously dismissed the appeal. Lord Justice Etherton gave the leading judgment, and Lord Justice Lewison and Lord Justice Rix agreed.

1. The Upper Tribunal could interfere with the First-tier Tribunal’s findings only for an error of law, including an Edwards v Bairstow error. The First-tier Tribunal had not merely resorted to the burden of proof. In relation to Transactions 2 and 3 it positively found, on the balance of probabilities, that no cash payment had been made to Aegis. Those conclusions were open to it on the evidence.
2. Under section 81(1)(b) of the Finance Act 1996, the relevant question was whether the debt arose from a transaction for the lending of money. Attention had to be directed to the transaction that created the debt. Parties’ descriptions could assist where the transaction was genuinely ambiguous, but they could not retrospectively alter its legal character.
3. For Transaction 2, the evidence permitted the conclusion that the cheque payment was made to a third party. There was no evidence that any such payment was made on Aegis’s behalf or for its benefit. The First-tier Tribunal was therefore entitled to reject the claimed loan relationship.
4. For Transaction 3, the First-tier Tribunal was entitled to prefer the straightforward explanation that Aegis’s existing debt to Carat had been assigned to MJP in consideration of MJP’s waiver of Carat’s debt. A novation would likewise have involved substitution of parties to an existing liability, not new money, a new loan or a new transaction for the lending of money.
5. The argument that the Loan Agreement itself created a new loan relationship was raised for the first time in the Court of Appeal. It would have required investigation of the agreement’s date, its true character and possible related-company tax provisions. It would therefore have been unjust to allow the point to be taken. The alternative issue under section 85(3)(c) and Schedule 9 was unnecessary to decide. The appeal consequently failed.

1. Court of Appeal (Civil Division)—dismissed MJP’s appeal from the Upper Tribunal: [2012] EWCA Civ 1558.
2. Upper Tribunal—on 2 September 2011, dismissed MJP’s appeal on a point of law from the First-tier Tribunal.
3. First-tier Tribunal—on 1 July 2010, dismissed MJP’s appeal against HMRC’s disallowance of the claimed corporation tax deduction.