MJP Media Services and loan relationships

If you look at it hard enough, the question of ‘what is debt’ becomes a philosophical one about the nature of obligations.

The law has, traditionally, had no real interest in such philosophical musings and has sought to place contractual relationships between parties into well known (or, at least, well labelled) categories.

Thus we can say that where A enters into dealings with B, A may come to owe an ‘obligation’ to B. However, not all such ‘obligations’ will give rise to a ‘debt’ owed by A to B.

Equally, even if there is a debt, not all ‘debts’ are the product of a ‘loan’ of money since A can come to owe a debt to B without there being any lending by B to A.

While this may not have mattered overmuch before FA 1996, we now need to analyse more closely what is the nature of the relationship between A and B to see if a loan relationship is present. The First Tier Tax Tribunal (FTT) has done such an exercise in the appeal of MJP Media Services (TC00586, [2010] UKFTT 298) and arrived at some significant conclusions.

MJP Media Services

In MJP Media Services the taxpayer was a subsidiary of the Aegis plc group which sought a deduction in its corporation tax computation in respect of amounts of ‘inter-company debt’ that it had waived.
The waiver gave rise to two issues before the FTT, one being whether there was a loan relationship on the facts of the particular case, and the other being whether any such deduction could be available at all given the terms of what was FA 1996 Sch 9, paras 5 and 6. The FTT decided the latter issue against the taxpayer as a matter of statutory construction and that, alone, would have been sufficient to dispose of the appeal.

The FTT had, however, also decided the former issue against the taxpayer on the basis that no loan relationship existed. It is this issue which casts light on the ambit of the concept of a loan relationship and which bears further scrutiny.

First, it will help to set out a précis of the factual position and the arguments of the parties. The taxpayer came to be owed what the FTT were happy to regard as a ‘debt’ by its parent company, Aegis, in an amount of about £6.8 million.

That sum came about as a result of a series of transactions over a two-year period between the taxpayer and Aegis whereby, the taxpayer said, sums of money had been advanced in cash by it to its parent; alternatively, said the taxpayer, the debt arose by virtue of it settling obligations of its parent to third-parties. In either case, the taxpayer said that there was a debt owed by Aegis to it as a result of a loan by it to Aegis.

In contrast, HMRC contended that there was no payment of cash by the taxpayer to Aegis and nor was there any ‘lending’ of money where the taxpayer discharged debts of its parent. A contention that the ‘lending of money’ requirement in FA 1996 s 81 could be met by virtue of an instrument issued by a person within s 81(3) was not pursued. Thus, relevantly, the stage was set for a dispute as to whether cash had actually moved (almost entirely a question of fact) or whether the discharge of a debt of another constituted a loan to that person (a question of law).

On the question of fact the FTT determined, after considering fairly detailed documentary material and cross-examination of the taxpayer’s witnesses, that no such movements of cash could be seen to have taken place.

Turning to the question of law the FTT seems to have accepted (or at least, assumed) that there were payments by the taxpayer to third parties to discharge the debts of Aegis such that it was necessary to decide whether such a transaction could ever give rise to a loan for the purposes of the loan relationships code.

In this regard the FTT determined that this is not the case; the ‘plain meaning’ of the language of FA 1996 s 81 ‘does not stretch to include payments to a third party which discharge the debt of another’. If correct, this would have the effect that when A pays a sum to C to discharge a debt of B, no loan relationship can arise, even in the common intra-group situation where one company discharges obligations of a group member and the sum is simply added to the inter-company receivables between them.

This decision will concern those groups which have treated such debts discharged as giving rise to loan relationships between the payer and the beneficiary company.

Is the FTT’s conclusion in this regard correct?

The Tribunal arrived at its view as to the scope of the statutory language solely (it seems) on the basis of its analysis of the decision of the House of Lords in Potts’ Executors v IRC [1951] AC 443 where at least some of their Lordships had apparently drawn a distinction between a loan by A to B and a payment by A to discharge the debts of B. The case of Potts is worthy of further analysis.

First, it was concerned with a different question as to whether sums were paid ‘directly or indirectly to the settlor’ by way of loan, in the context of an assessment to surtax.

Second, while Lords Normand and Simonds do apparently draw the distinction relied upon by HMRC, this view was not shared by Lords MacDermott or Morton and the attitude of Lord Oaksey is, on this matter, equivocal. In effect, their Lordships seem evenly split.

Third, the potential distinction between a loan directly from A to B and the payment by A to discharge the debts of B has been considered in another authority, not referred to by the FTT.

It is clearly established that where A pays C on behalf of B, this can be seen as money paid to B (see Parsons v Equitable Investment Co Ltd [1916] 2 Ch 527). In Re HPC Productions Ltd [1962] Ch 466 the Court (Plowman J) determined that a payment made by A to C outside the UK at the request of B (within the UK) was not a loan within the relevant definitions in the Exchange Control Act 1947.

The Judge went on to recognise, however, that such a transaction could be regarded as giving rise to a claim in restitution or be seen as a loan. In this way there is recognition that the decision of the majority of the House of Lords in Potts cannot be treated as authority for a universal truth.

Fourth, it is important to bear in mind that the FTT accepted, correctly, that there was a debt owed by Aegis to the taxpayer. (Such a debt arises by virtue of the agreement between A and B or as a result of a claim in restitution where A is compelled to pay the debts of B: see Brook’s Wharf Ltd v Goodman Bros [1937] 1 KB 534.)
If such a ‘debt’ in money exists this must be the result of an obligation owed by Aegis to the taxpayer to ‘repay’ (or at least, ‘pay’) an equivalent amount of money to the taxpayer.

Given such an obligation, and such a debt, it seems hard to say that if the real relationship between A and B is that A will discharge the debts of B to C if B agrees to pay equivalent sums (with or without interest) to A there has been no loan by A to B.

The notion of a loan is commonly regarded as an agreement by which one party (the 'lender') agrees to pay money to another (the 'borrower'), or to a third party at the borrower's request, on terms that the borrower will repay the money together with any agreed interest, where the payment is made with a view to giving the borrower ‘financial accommodation’ (see Halsbury’s Laws, Vol 9, Part 2).

If this is so (and it is submitted that it is) there seems nothing to prevent the settlement of a parent’s debts by its subsidiary from amounting to a loan for the purposes of FA 1996.

It may be seen from the above that the FTT’s decision that discharging debts can never amount to a loan (and thus a loan relationship) is open to serious question; indeed, the better view is that it can be and, at least usually, will be. It is to be hoped that an appeal is brought and the matter addressed by the Upper Tier.

Jonathan Peacock QC practices at 11 New Square, Lincoln's Inn. Email: jonathan.peacock@11newsquare.com; tel: 020 7242 4017.