Shinelock Limited v The Commissioners for HMRC

An appeal against a closure notice is confined by the conclusions and amendments stated in that notice, but the parties may rely on different legal reasons to justify or challenge those matters, subject to procedural fairness. A review cannot retrospectively widen the scope of the appeal.

For the loan relationship rules, a payment made out of company assets to a controlling party was a distribution under paragraph F of section 1000 of the Corporation Tax Act 2010. The payment depended on the results of the company’s business because “business” and “results” are broad concepts encompassing capital gains from the acquisition, holding and disposal of a business asset. Section 465(1) of the Corporation Tax Act 2009 therefore prevented the payment from generating a deductible loan relationship debit.

Shinelock appealed against the First-tier Tribunal’s dismissal of its appeal concerning corporation tax assessed on a chargeable gain from the disposal of property. It argued that a payment of the gain to its controlling party was deductible under the loan relationship rules.

The FTT held that it had jurisdiction to consider the argument, that the payment was not a distribution, and that no deductible loan relationship debit arose. HMRC challenged the jurisdiction and distribution findings. Shinelock challenged the FTT’s treatment of the debit and alleged procedural unfairness. The central issues were the scope of the appeal, whether the payment was a distribution, and whether it could be brought into account as a non-trading loan relationship debit.

1. Jurisdiction. The FTT was entitled to construe the closure notice as concluding that there were no losses or reliefs available to offset the chargeable gain. The “matter in question” was therefore broad enough to include Shinelock’s loan relationship argument, even though that argument had not formed part of HMRC’s reasoning when the notice was issued. The subsequent review could not retrospectively enlarge the scope of the closure notice, but that error did not affect the result.
2. New arguments. The FTT may raise or permit new legal arguments, but must ensure procedural fairness. Parties must have a fair opportunity to address an argument and, where necessary, adduce evidence or seek an adjournment. An argument concerning whether the payment was “in respect of” a loan relationship was introduced by the FTT without that opportunity and would have required the decision on that issue to be set aside. The accounting-recognition issue was sufficiently in play because section 307(2) formed part of the statutory requirements relied on and the evidence had addressed accounting treatment.
3. Distribution. The parties conceded that the payment was made out of company assets. Section 1114(3) deemed a security to exist for the relevant purposes. The payment was made to the controlling party in his capacity as holder of that deemed security and was therefore made “in respect of” securities within paragraph F of section 1000(1) of the Corporation Tax Act 2010.
4. Condition C in section 1015 was widely framed. “Business” was wider than trade, “results” included income and capital items, and dependence “to any extent” was sufficient. The gain from the acquisition, holding and disposal of the property formed part of the company’s business results. The payment was consequently a distribution under paragraph F.
5. Section 465(1) of the Corporation Tax Act 2009 prevented the payment from being brought into account for the loan relationship code. The appeal was dismissed. The Tribunal did not determine the remaining substantive issues, although it indicated that the FTT’s decisions on paragraphs B and E would otherwise have been procedurally unfair.

• First-tier Tribunal (Tax Chamber): dismissed Shinelock’s appeal against the corporation tax amendments: [2021] UKFTT 320 (TC).
• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeal. It set aside the FTT’s decision that the payment was not a distribution and remade that decision, holding that the payment was a distribution under paragraph F of section 1000 of the Corporation Tax Act 2010.