© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
H7. Financial concepts
Due and payable
- When there is a right to enforce payment
"[20] It is common ground between the parties that a dividend is “due and payable” for the purposes of section 1168(1) CTA 2010 where the shareholder entitled to the dividend has a right to enforce payment." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
- Interim dividend usually does not create debt prior to payment
"[22] In Lagunas Nitrate Company Ltd v Schroeder and Co and Schmidt (1901) 85 LT 122, the directors resolved to pay an interim dividend. Shortly afterwards, in light of pending litigation, the directors resolved to postpone payment of the interim dividend. Joyce J noted that Lindley on Company Law and Buckley on the Companies Acts stated that “where a dividend is declared it becomes a debt due from the company to the shareholders”. However, he distinguished the declaration of a dividend and a resolution for payment of an interim dividend. He held that prior to payment of an interim dividend, the company was not obliged to pay it. The directors could reconsider whether it ought to be paid at all." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
- Interim dividend usually does create debt once paid to one shareholder
"[39]...We see no reason to distinguish between final dividends and interim dividends at the stage where the directors have not only resolved to pay a dividend but have also made payment to some but not all of the shareholders. If a shareholder is not paid their share of an interim dividend then a debt arises at the time the other shareholders are paid. That must follow from the principle that shares of the same class confer the same rights and impose the same liabilities." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
- Subject to agreement to the contrary
"[72] Overall, we consider that the FTT did not err in failing to specify what amendment was being made to the articles. The FTT specified the amendment at [100] and [101] of the Decision. Further, the FTT was entitled to find that the members intended to informally amend the articles even though they did not have the articles in mind when agreeing the terms on which the interim dividend would be paid." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
- Or subject to binding waiver by the shareholder
"[86] The parties’ arguments on waiver before the FTT focussed on whether there was consideration for such a waiver. [The taxpayer] submitted that the waiver agreement occurred before NG was paid his dividend and therefore before any debt could have arisen. The waiver was supported by consideration in that the directors of Regis agreed to pay an interim dividend and PG agreed to waive his right to enforce payment.
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[94] We are satisfied that the FTT was right to find that the agreement it had identified did not fall within the principle of Foakes v Beer. That is because PG’s waiver of the right to enforce the debt was agreed before the directors resolved to pay the interim dividend. In those circumstances, we do not accept Mr Bradley’s submission that there was no consideration. PG agreed to waive his right to enforce payment of a dividend until after 5 April 2016 if Regis agreed to pay the interim dividend. At the time of that agreement there was no enforceable debt. It is not the case of an existing creditor agreeing to give up an entitlement to be paid without receiving anything in return.
[95] [HMRC] also submitted that the FTT was not entitled to find on the facts that there was any such agreement. He relied on the same arguments as in relation to whether there was an agreement to amend the articles for the purposes of Ground 2. Namely, that there could be no agreement to waive enforcement of a debt where the directors were simply following advice premised on an understanding that the interim dividend could be paid to NG without a debt becoming due and payable to PG. The facts were more consistent with a shared misunderstanding as to the existence of a debt than with an agreement to waive a debt.
[96] For the same reasons as set out under Ground 2, we consider that the FTT was entitled to find and did find at [114] that there was an agreement by PG to waive his right to enforce the debt. We can see no basis on which to interfere with that finding." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
Tax payable
- Assessment is good evidence of tax payable for calculating penalty, but not essential
"[89] Subsection (2) accordingly simply limits the amount of the penalty payable. It does not impose the penalty. I do not see thus that it is necessary for there to be any assessment of the tax payable for the relevant years under either (a) or (b) before the limit placed on the amount of the penalty can be calculated. Subsection (2) is simply concerned to establish a limit being the difference between what tax would have been "payable" while a negligent or fraudulent return was in place - i.e. (b) - and what would have been "payable" with an accurate return - i.e. (a).
[90] I do not with respect believe that IRC v Nuttall or IRC v Woollen have any real relevance to the calculation of the limit under section 95(2). An agreement or compromise with HMRC may provide very good evidence as to what was "payable" and thus be relevant in that sense. But it is irrelevant that the compromise itself produces a debt rather than a tax liability. What one is concerned to do is to establish what was "payable" in the two different situations.
The terms of the compromise would seem to provide good evidence both of what would have been payable if the incorrect returns over the relevant years had been correct – i.e. (b) under subsection (2) of section 95 - and that which would have been payable if correct returns had been made - i.e. (a) under that subsection - the difference according to the compromise being the amount of £76,508.75.
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[94] I cannot accept this latter argument as legitimate. It fails in my view because it overlooks the fact that subsection (2) is concerned to define the limit of a penalty by reference to the difference in tax "payable" with a correct return (a) and tax "payable" by virtue of an incorrect return (b). Subsection (2) is not concerned with whether there has been an actual assessment, and an actual assessment produced as part of a compromise does not provide any evidence of what was "payable" with a correct return as opposed to that which was "payable" with an incorrect return." (Stockler v. HMRC [2010] EWCA Civ 893, Waller LJ)
"[114] As for context, I agree with Sir Mark Waller that the fact that the compromise creates a contractual debt and that there are no amended returns is irrelevant in the context of section 95(2), which is solely concerned with the process of calculating the ceiling on the amount of the penalty that can be imposed on the taxpayer. It is not concerned with recovery of tax, or with proof of tax as a preferential debt, or with a defence to an action by HMRC for recovery under a settlement agreement.
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[119] I would not for a moment doubt the correctness of any part of the decision in Woollen that a sum due from the taxpayer under a settlement agreement with HMRC does not qualify as a preferential payment in the administrative receivership because it is not a claim for payment of tax. What I do not think is legitimate is to read that decision on the character of a contractual claim for payment in the context of proof for a preferential payment across to the quite different context of ascertaining, for the purposes of a cap on the amount of a penalty on the taxpayer, the amount of tax payable by a taxpayer, who has entered into a settlement agreement binding him to pay to HMRC an agreed amount in respect of the tax claimed plus interest." (Stockler v. HMRC [2010] EWCA Civ 893, Mummery LJ)
Expenditure
- Can include incurring an obligation
"Parties were agreed that on the authority of Chaney v Watkis [1986] STC 89, 58 Tax Cas 707 the incurring of an obligation which is capable of being valued in money could constitute expenditure for the purposes of s.32." (Garner v. Pounds Shipowners and Shipbreakers Limited [2003] UKHL 30, Lord Jauncey)
- Issuing shares not expenditure
"I come back to the facts of this case, and I ask whether the issue of these shares in the manner adopted involved the respondent in any "disbursements or expenses .... wholly and exclusively laid out or expended for the purposes of" its trade. Its capital was intact after the issue of the shares: not a penny was in fact disbursed or expended. Its trading receipts were not diminished, nor do I think it is a right view of the facts to say that the respondent gave away money's worth to its own pecuniary detriment. The company was entitled to issue its shares at par. It did so, and the company never received, and never elected to receive, anything more than the par value of the shares. Quite apart from any desire to let the employees have a share interest in the company, the directors might have had very good reasons for deciding not to issue shares to the company's employees at a price which could only be justified by an expectation of very high dividends over a long period of time." (Lowry v. Consolidated African Selection Trust [1940] AC 648 at 657, Viscount Caldecote)
Incurred
- To render oneself liable to present or future expenditure, even if unascertained
"If it can be shown that in any case (a) the taxpayer company specifically gave unconditional approval to the purchase by the local authority of the equipment and (b) at that time there was final agreement of the terms to be included in the lease schedule, in my judgment the taxpayer company incurred the expenditure when the local authority purchased the equipment because it then came under a liability to reimburse the local authority. In any other case, liability was not incurred until the lease schedule was completed when, for the first time, the full terms of the letting were agreed and the contractual obligation to reimburse arose." (Melluish v. BMI [1996] AC 454 at 479 and 485, Lord Browne-Wilkinson)
"In my judgment the word 'incurred' is apt to describe the point in time at which the debtor became legally committed to some future expenditure albeit unascertained. If the debtor knows in respect of a service which he has received that he will have to pay for that service on some date in the future, if he has not already done so, I believe that in the ordinary sense of the words he has incurred a debt, albeit that the debt will not be due until that future date and although its quantum may not be capable of ascertainment because of the possibility of discharge or partial discharge between the date on which it is incurred and the date on which it becomes due and payable.
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In my judgment 'incur' in the present case means, as I have said, to commit the debtor to future expenditure albeit unascertained, and for those reasons in my judgment Mr Grant incurred a debt." (Grant v. Watton [1999] STC 330, 347...348, Pumfrey J)
"'“To incur” means “to render oneself liable to”. Expenditure is incurred, whether or not there has been any actual disbursement, if the taxpayer has legally committed himself to that expenditure.'" (Ensign Tankers (Leasing) Ltd v. Stokes [1989] STC 705 at 769, Millett J considering whether a non-recourse loan involved incurring expenditure)
- "Incurred" does not necessarily require the bearing of economic burden
"[103] HMRC refers to the decision in Ingenious Games LLP; Inside Track Productions LLP; Ingenious Film Partners 2 LLP [2019] STC 1851, where the UT expressed the view (obiter) that an expense will only be “incurred” where the taxpayer bears the “economic burden” of an expense. HMRC invites the Tribunal to apply the same approach in the context of this case.
[104] Having considered the judgment of the Supreme Court in Revenue and Customs Commissioners v NCL Investments Ltd [2022] UKSC 9, with regard to section 54 of the Corporation Tax Act 2009 (which is analogous to section 34 ITTOIA 2005 and provides, for corporation tax purposes, that no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade), I reject the approach suggested by HMRC. The point is addressed by the Supreme Court, as follows:
“36. As to whether the Debits were expenses “incurred”, Mr Ghosh points out that neither section 48, nor any other provision in CTA 2009, deems the Debits to have been “incurred” by the Companies. He submits that given that the Companies suffered no cost in relation to the Debits, the Debits cannot be said to have been “incurred” by the Companies.
37. In this connection, Mr Ghosh again seeks to rely on Lowry and the majority’s approach in that case to what was required for expenses to be “laid out or expended”, the predecessor wording to “incurred” in section 54(1)(a). Reliance is also placed on an obiter passage in the Upper Tribunal’s decision in in Ingenious Games LLP v Revenue and Customs Comrs [2019] STC 1851, in which it was stated that the term “incurred” in section 54(1)(a) CTA 2009 is “concerned with whether the taxpayer bore the economic burden of an expense” (para 434) and that that approach “makes sense given the context of the statutory test, namely the determination of profit” (para 457).
38. We reject HMRC’s case that section 54 imports a further requirement as to what constitutes an “expense”, namely that it has to be shown to be “incurred”. The requirements for what constitutes an expense are as set out in sections 46 and 48. These are part of Chapter 3 which is headed “Trade Profits: basic rules”. Those basic rules require that it is brought into account as a debit in accordance with generally accepted accounting principles (section 46). If so, it will be an expense for the purpose of the calculation of trading profits, whether or not an amount has actually been paid (section 48(1) and (2)).”
[105] In Mr Northwood’s case, the basic rules also require profits of the trade to be calculated in accordance with generally accepted accounting practice (under section 25(1) ITTOIA 2005). I do not consider there to be a further requirement for Mr Northwood’s contribution to be shown to be “incurred” and I do not accept, as HMRC suggest, that I should adopt a different approach because the Supreme Court decision was in the context of a case that did not concern tax avoidance." (Northwood v. HMRC [2023] UKFTT 351 (TC), Judge Sukul)
- Expenditure incurred on capital asset where purchased and leased back, with purchase price used as security for rent
"[39] [39] The present case, like MacNiven, illustrates the need for a close analysis of what, on a purposive construction, the statute actually requires. The object of granting the allowance is, as we have said, to provide a tax equivalent to the normal accounting deduction from profits for the depreciation of machinery and plant used for the purposes of a trade. Consistently with this purpose, s 24(1) requires that a trader should have incurred capital expenditure on the provision of machinery or plant for the purposes of his trade. When the trade is finance leasing, this means that the capital expenditure should have been incurred to acquire the machinery or plant for the purpose of leasing it in the course of the trade. In such a case, it is the lessor as owner who suffers the depreciation in the value of the plant and is therefore entitled to an allowance against the profits of his trade." (Barclays Mercantile Business Finance Ltd v. Mawson [2004] UKHL 51)
- Interpreted as requiring a commitment in substance irrespective of form
"[96] A number of points need to be made about the way in which that question should be asked, and the reason why it is framed in those terms. The first is that, to serve the statutory purpose, it is a question of substance rather than of form. The purpose is to ascertain whether there was a contractual commitment to the relevant expenditure by the tenth anniversary. That might arise in a particular case from a much earlier original contract, altered by one or more variations before the tenth anniversary, or from the replacement of an original contract by a new contract, again by that date. In neither case would it matter whether, as a matter of form, the parties had used the mechanism of variation or replacement. The only question of substance would be whether by the tenth anniversary their contractual relationship included the necessary commitment." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
- Incurring expenditure through an agent who made all the practical arrangements and appeared to be the purchaser
"I am unable to accept the second ground of decision. One of the factors underlying the transactions was that it was important to the local authorities that they never became the owner of the equipment: by so doing they avoided any charge against their capital allocations. The intended scheme appears to have been that, although the local authority made all practical arrangements and, to the outside world, was the purchaser and owner of the equipment when purchased, it should in fact purchase as agent for the taxpayer companies. For that purpose what was required was (a) an agreement of the terms eventually to be included in the lease schedule (paragraph 1 of the letter) and (b) approval by the taxpayer company of the purchase by the local authority. The special commissioners reached the conclusion that there was no contract of agency until the lease schedule was executed. If that was a finding of fact in relation to the Easington case, in my judgment it is unimpeachable. But if, as I think, it was intended to be a finding in law applicable to all the cases, in my judgment it cannot stand. The whole scheme of the arrangements between the parties and the wording of the facility letter show that there were intended to be three stages: first, the approval by the taxpayer company of the purchase by the local authority as agent (paragraph 2); second, the purchase by the local authority as agent for the taxpayer company (paragraph 2); third, the reimbursement of the local authority and the simultaneous execution of the lease schedule (paragraphs 3, 4 and 6). If, in any case, those arrangements were properly operated, the approval of the purchase by the local authority and the actual purchase would predate the execution of the lease schedule. Provided that, at the time that approval was given, there was a final and certain agreement as to the terms which were to be included in the lease schedule, there is no reason in law why the approval should not have been given to the purchase by the local authority at a time before the lease schedule was executed.
In my judgment therefore, contrary to the decision of the Court of Appeal, the special commissioners' decision was erroneous in point of law in so far as it purported to decide all the cases in issue. The true determination of the question "when was the liability incurred?" requires a finding of fact in relation to each individual case. If it can be shown that in any case (a) the taxpayer company specifically gave unconditional approval to the purchase by the local authority of the equipment and (b) at that time there was final agreement of the terms to be included in the lease schedule, in my judgment the taxpayer company incurred the expenditure when the local authority purchased the equipment because it then came under a liability to reimburse the local authority. In any other case, liability was not incurred until the lease schedule was completed when, for the first time, the full terms of the letting were agreed and the contractual obligation to reimburse arose." (Melluish v. BMI [1996] AC 454 at 479 and 485, Lord Browne-Wilkinson)
Advance
- Early payment of an amount that will or may become due in the future
"[59] Mr Gammie’s primary submission was that the Company did not “advance any money to an individual who is a participator” within the meaning of section 419(1) ICTA 1988 for the same reasons as those given in relation to the making of a loan. He further submitted, relying on Bronester, that advance means a payment of an amount that will or may become payable by the Company to the employee and it was not an appropriate term for an amount that may (on certain contingencies) become due from the employee to the Company.
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[61] ... If money paid by way of loan is not money that the payee may be absolutely entitled to in the future then there is no element of advance in the loan. We conclude, as the FTT did and for the same reasons, that the provision of the Facility Amount was not an advance of money." (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), Warren J and Judge Sinfield)
Loan
- Can include a present obligation to repay in the future upon a contingency occurring
"[55] There can, in our view, be a loan of monies where there is a present obligation to repay those monies in the future upon the happening of defined events, that is to say a Contingent Event occurs. This is so notwithstanding that there are circumstances in which a lesser sum will be repayable or, indeed, nothing will be repayable at all. Clauses 3.1, 3.3, 3.4 and 5 3.5 are, in our view, not concerned with creation of an obligation to repay the Facility Amount or Debt but when that obligation becomes operative, ie the timing of the repayment...
Further, the non-recourse provision in clause 4 of the Facility Agreement does not mean that the employee was not liable to repay the Facility Amount, only that the amount actually repayable on the occurrence of a Conversion Event might be less than the Facility Amount.
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[56]...It follows that under the Facility Agreement, the employee had an obligation to repay the Facility Amount although the date of repayment was uncertain, because it was linked to the occurrence of a Conversion Event, as was the amount of the repayment, because it was linked to the value of the shares and any other items specified in clause 4 of the Facility Agreement. Those uncertainties as to date and amount of repayment do not prevent the Facility Amount from being a loan (see Grant v Watton (Inspector of Taxes) [1999] STC 330 discussed at [68] below)." (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), Warren J and Judge Sinfield)
- Payment by A to C at the request of B can be a loan by A to B
"[50] We do not regard Potts’ Executors as authority for the proposition that, with the exception of banking transactions, where A, at the request and on behalf of B, pays an amount to C that transaction cannot be regarded as a loan by A to B. There is no clear ratio to be derived from Potts’ Executors. We agree that a payment to a person by way of loan to enable him to discharge a debt and a payment to the person’s creditor to discharge that debt are not the same thing. However, as Lord MacDermott observed, and Lords Simonds and Normand accepted to a limited extent, it all depends on the circumstances." (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), Warren J and Judge Sinfield)
- Money not loaned by company where it is misappropriated
“The crucial question, as it seems to me, is this. Did the company pay the money in question to Mr Pittas? He undoubtedly took it from the company's till, or from the company's debtors, but did the company pay it to him? It is of course tempting to identify an individual with a company where you have a case that is so nearly a one-man company as this, but one cannot answer questions under this legislation by any identification of that kind, for as I have said the very basis of the scheme of taxation is the distinction between the company and those interested in it.
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In my view an outright misappropriation of a company's money cannot be treated as the act of the company except possibly if all the corporators of a solvent company consent to it.
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Once you treat Mr Pittas and the company as separate persons, as you must under this legislation, in my view the company cannot be said, in the circumstances found by the commissioners, to have made an advance or a loan to Mr Pittas.” (Stephens v. T Pittas Ltd [1983] STC 576, Goulding J)
- Loan not outstanding following voluntary release
"[43] We do not consider there to be any magic in the use of the word "irrecoverable" together with word "outstanding" and we reject the suggestion that when these two words are used together, the meaning of the word "outstanding" is changed. We cannot see why Parliament would have intended the word "outstanding" to take on a different meaning in different provisions of the TCGA and we consider that the meaning of that word as it applies elsewhere in TCGA (as accepted by Mr Chacko) is also the meaning that is to be given to it in s253(3)(a). Notwithstanding the presence of the word "irrecoverable", we do not consider there to be any tension or conceptual difficulty caused by reason of according a meaning to "outstanding" which recognises a continuing entitlement to pursue the debt. We consider that a loan may be both outstanding (in the sense that obligations remain to be performed under it which there is an entitlement on the part of the lender to enforce) and also irrecoverable (in the sense of impossible to get back)." (HMRC v. Bunting [2025] UKUT 96 (TCC), Joanna Smith J and Judge Aleksander)
- Loan to parent company, left outstanding, not a distribution + not artificial
"[24] At the end of his long judgment, Anderson J concluded [Record pp526-527] that the loans were not genuine loans within section 35 of the Income Tax Act, and that they were distributions within section 34. If necessary he would have held that the transactions were artificial. Mr McCall does not seek to support his first ground of decision, but does support the alternative ground based on section 16.
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[26]...(5) The group structure was not, as the judge seems to have been suggesting, a reason for treating the loans as artificial. It was, on the contrary, the commercial context in which there was nothing abnormal or artificial in the loans being unsecured, interest-free, and documented only by normal accounting and auditing processes. Had the CCJ been a wholly-owned subsidiary of Carreras throughout the relevant period the conclusion that the loans were not artificial would have been clear and irresistible. It would have been a paradigm case of a loan which, although not on commercial terms if looked at in isolation, falls squarely within proviso (i) to section 35(1) of the Income Tax Act. Any element of bounty in the transaction would have remained within the reach of Jamaican corporate taxation.
[27] In fact, as already explained, there is some reason to suppose that during the 1990s the Board of CCJ paid insufficient attention to the interests of a small and diminishing number of minority shareholders. But in the Board's opinion that cannot make artificial what would otherwise have been standard practice in corporate group structures throughout the world. There was no artifice in this apparent error. On such evidence as there is it seems to have been an oversight, and not part of a plan." (Commissioner of Taxpayer Audit v. Cigarette Company of Jamaica Limited [2012] UKPC 9)
Release
- Debt released even if consideration provided unless no outstanding obligation on any person in respect of similar sum
"[43] Applying the analysis provided by Nourse LJ, including the analysis adopted from Millett it is, in our view, clear that a release will be taxable even where there is valuable consideration in a contractual sense, unless that consideration results in there being "no outstanding obligation on any party in respect of the debt or any similar sum" thereby enabling the party making the release "to recover its money". Only where there is no debt owed by any party can it be said that there has been no distribution by the close company. The close company has not been made whole, as in Collins it has the means by which it may recover the money but has not recovered it. In this regard we see no relevant distinction between substitution of a debtor (as was the case in Collins) and the substitution of the creditor where that substituted creditor does not enable the original creditor to recover its money. In the latter case there remains an outstanding obligation to the original creditor of a similar sum i.e. the value of the novated debt. We do not consider that for the purposes of the "limitation" applied to section 415 ITTOIA a debt can be "satisfied" where the sum remains outstanding. Cash or physical assets may satisfy the indebtedness but not a right to call on another in connection with the debt." (Powell v. HMRC [2025] UKFTT 528 (TC), Judge Amanda Brown KC)
Written off
- Not written off where formal writing off process deliberately not followed
"[60] The ordinary meaning of the term "written off" from the Cambridge English dictionary: "to accept that an amount of money has been lost or that a debt will not be paid" is helpful insofar as it seeks to provide a definition where there is otherwise none. Collins, also, provides an example of what a written off debt may look like in that it may yet be recovered by a company. But neither of these interpretations need apply in circumstances where there is a formal writing off process which has deliberately not been followed.
[61] Even if we take the ordinary meaning of the term, we do not agree that the actions of the liquidator in writing the Report and in dissolving BOH amount to an acceptance that the money has been lost or that a debt will not be paid. The liquidator states clearly in Liquidator Letter 1 that there was no formal write-off of the Director's Loan Balance. The prospect of a reinstatement of BOH in order that Mr Quillan should be pursued at some future point is unlikely but not impossible. It was within the power of the liquidator to either release or write off the loan, yet he chose to do neither. This leaves the Director's Loan Balance open to be pursued on behalf of BOH should that become appropriate at some point in the future. To suggest otherwise is to ignore the intentions of the liquidator's actions and the plain meaning of his language when he said that the Director's Loan Balance had not, in fact, been written off." (Quillan v. HMRC [2025] UKFTT 421 (TC), Judge Susan Turner)
PROFIT AND LOSS
Profit
- Accounting concept that does not necessarily mean a person is entitled to any money or assets
"[73] ... A profit is an accounting concept, so a partner may become entitled to a profit share without necessarily receiving or becoming entitled to any partnership money or assets: although a division of profits has taken place, it does not follow that each partner will necessarily be entitled to withdraw his share, since that will depend on what agreement the partners have made regarding the use of the share of the profit to which they are entitled (see Lindley & Banks on Partnership, 21st ed (2022), para 21–10)..." (HMRC v. HFFX LLP [2026] UKSC 17)
Adjustment required or authorised by law
Loss
- Generally limited to statutory adjustments
"[29] Leaving aside the question, discussed further below, of whether it is appropriate to refer to pre-tax rewrite authority, we do not consider that Lowry assists HMRC. There was no finding in that case of what ordinary principles of commercial accounting then required. There was no equivalent to section 46 CTA 2009 giving statutory primacy to generally accepted accounting practice. Tax is the creature of statute and, as the citations above from Odeon and William Grant make clear, adjustments required or authorised to be made to profits calculated in accordance with generally accepted accounting principles are likely to be adjustments specified by statute. While it is possible for a judge-made rule to require or authorise such an adjustment to be made, it would have to be a rule which it is clear applies notwithstanding that the company’s profits have been calculated in accordance with generally accepted accounting principles. Lowry provides no support for there being such a rule. Nor have we been referred to any other authority which shows there to be a relevant such rule. In addition, as Pennycuick VC pointed out in Odeon, there is no general theoretical basis for the courts to calculate profits other than generally accepted accounting principles.
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[33] There is nothing in the cases cited to us, or in the taxing statute or in the accounting standards themselves that make a distinction between those accounting practices which are directed at showing a true and fair picture of profit and those which are directed at showing a true and fair picture of something else. There is no adjustment required or authorised by law to the effect that if profits in the P&L account are depressed because of an entry which is matching an entry in the balance sheet, then that is to be left out of account in calculating profits for corporation tax. Nor do we see any policy justification for drawing that distinction. On the contrary, a company’s balance sheet and P&L account are not separate and severable in the way that Mr Ghosh’s argument suggests because entries on one may affect entries on the other in order that, overall, they give a true and fair view of the financial state of the company. The requirements set out in IFRS2 themselves demonstrate the interrelation between the two documents by specifying that a P&L account item is matched by a balance sheet item. Further, the logic behind identifying a capital contribution from the parent in the grant of share options to the subsidiary’s employees and in treating the consideration for that as the ephemeral additional services provided by the subsidiary’s employees incentivised by the grant of the options is a logic that is based in the real world - that is indeed what is happening in a commercial sense. There is in our judgment no basis for ignoring those aspects of the transaction when applying section 46." (HMRC v. NCL Investments Ltd [2022] UKSC 9)
"[64] In short, there is no need for judges to step in to ensure that differences in tax treatment between penalties or fines and alternative forms of redress are avoided. The policy imperative for a rule that would deny a deduction for amounts that are not in fact penalties or fines is simply not there. Further, I cannot see that it would properly be a matter for the courts, rather than Parliament, to develop such a rule. The principle established by von Glehn is clear and obviously correct for the reason explained by Lord Hoffmann in McKnight v Sheppard, but its proper limits need to be observed." (Scottishpower (SCPL) Limited v. HMRC [2025] EWCA Civ 3, Falk, Snowden, Zacaroli LJJ)
- Loss referable to a period not required to be crystallised
"[75] In the light of the purpose of the loan relationship regime as a whole, and s 327 in particular, I accept that the loss can be taken to be referable to a time before migration only if, at that time, the loss existed or had arisen as a matter of commercial reality.
[76] This does not however require the loss to have been triggered or crystallised prior to migration. An unrealised or unrecognised loss (as the parties acknowledge) is sufficient.
[77] It is, in my view, clear from the wording of s 327, that the question of referability is an objective test. The question is whether an informed and independent third party would consider the loss to have arisen or existed in the pre-migration period and not whether the taxpayer had a subjective belief that a loss existed or had arisen. I accept Mr Fell's submission that, given the purpose of s 327, it is unlikely that Parliament intended that the application of that provision should depend on whether the taxpayer in question considered a loss to exist or to have arisen prior to migration.
[78] Contrary to Mr Prosser's submission, I consider that the question as to whether the loss existed or had arisen in the pre-migration period must be answered with hindsight as it is only once the loss has been crystallised (and therefore identified) that the question as to whether that particular loss is referable to a time in the pre-migration period can be addressed." (UK Care No.1 Limited v. HMRC [2024] UKFTT 542 (TC), Judge Vos)
PAYMENTS AND EXPENDITURE
Paid
- Money not paid by company where it is misappropriated
“The crucial question, as it seems to me, is this. Did the company pay the money in question to Mr Pittas? He undoubtedly took it from the company's till, or from the company's debtors, but did the company pay it to him? It is of course tempting to identify an individual with a company where you have a case that is so nearly a one-man company as this, but one cannot answer questions under this legislation by any identification of that kind, for as I have said the very basis of the scheme of taxation is the distinction between the company and those interested in it.
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In my view an outright misappropriation of a company's money cannot be treated as the act of the company except possibly if all the corporators of a solvent company consent to it.
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Once you treat Mr Pittas and the company as separate persons, as you must under this legislation, in my view the company cannot be said, in the circumstances found by the commissioners, to have made an advance or a loan to Mr Pittas.” (Stephens v. T Pittas Ltd [1983] STC 576, Goulding J)
- Netting off can amount to payment
"There are no doubt cases where, for example, a payment in cash is deemed to be the result of an accord and satisfaction. You need not pass cheques backwards and forwards across a table. But we have nothing of that kind here." (Lowry v. Consolidated African Selection Trust [1940] AC 648 at 666, Viscount Maugham)
"[63] I accept that it is possible to treat the "netting off" as between Mr Underwood and Rackham Ltd, through the payment of the £20,000, as being a payment of the £400,000 to Mr Underwood and a payment of the £420,000 to Rackham Ltd (see e.g. the analysis in Coren v Keighley (1972) 48 TC 370, 375). To that extent, I would agree with the Special Commissioners rather than Briggs J (although the difference between their respective analyses is very refined and pretty slight). While, as Briggs J said, it is a somewhat artificial analysis, the two contracts between Mr Underwood and Rackham Ltd were, in my opinion, performed, rather than cancelled, by the payment of the £20,000." (Underwood v. HMRC [2008] EWCA Civ 1423, Collins, Neuberger, Goldring LJJ)
"It is immaterial that the £2,250 was not handed over by the taxpayer to the vendor on completion and then handed back again. As was established in In re Pen'Allt Silver Lead Mining Co. (Fothergill's Case) (1873) 8 Ch.App. 270and In re Harmony and Montague in and Copper Mining Co. (Spargo's Case) (1873) 8 Ch.App. 407, 412, if two cross-demands for money immediately payable are honestly set off against each other without the formality of handing the money over and handing it back again, each such set off would substantiate a plea of payment in cash and a set off would constitute such payment. The principle was applied in Ex parte Bolland (1879) 21 Ch.D. 543to the case of a transfer by A to B followed immediately by a mortgage by B to A." (Coren v. Keighley [1972] 1 WLR 1556 at 1560 Ungoed-Thomas J - transaction treated as sale + loan rather than sale with purchase price left outstanding)
- Declaration of trust over money can be payment
"[8] The section applies only to a 'gift' which 'is expressed as a gift to the transferor [here IBS]'. As is clear from Clause 6.1 this case is not concerned with a pecuniary legacy to IBS. Instead, the will gives the residuary estate to the Trustees who are then to hold it on trust for the beneficiaries. In normal language that may be a gift for each beneficiary, but not to the beneficiary. I can however see no sensible reason why the application of the statute should be confined by such a narrow interpretation. The obvious purpose of the section is to ensure that money (or property) which the benefactor has specified should pass to a charity accompanies it into the entity into which the charity has been merged notwithstanding that the benefaction is not to take effect until a time which postdates the merger. That purpose is in my view equally engaged whether the route of benefaction runs directly to the donee or a trustee is interposed with an obligation to confer the benefit using the money (or property) provided by the benefactor." (Re Longman [2012] EWHC 666 (Ch), David Donaldson QC)
- "Contributions paid" means paid in money
"[62] At paragraph 42 in Sippchoice the Upper Tribunal found that
“… If, as we have found, ‘contributions paid’ in section 188(1) FA 2004 means paid in money then it cannot encompass settlement by transfer of non-monetary assets even if the transfer is made in satisfaction of an earlier obligation to contribute money. An agreement to accept something other than money as performance of an obligation to pay in money does not convert the transfer of shares (or other assets) into a payment in money. It is difficult to see why legislation relating to pension contributions should distinguish between and provide different tax treatments for transfers of assets in place of payments made under a contractual obligation and transfers of assets in place of payments made freely at the option of the payer.” (emphasis added).
It is clear from paragraph 46 of Sippchoice that the Upper Tribunal found that a transfer of non-cash assets made in satisfaction of pre-existing money debts are not contributions paid. The IOU is a pre-existing money debt. That is why, in order to succeed in these appeals, the appellant needs to establish that the IOU is a contribution paid."
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[75] Whilst I accept that the IOU, once delivered to the Scheme, is an asset of the Scheme, I find that it is the same as any other creditor recorded as an asset. Those creditors have not paid anything until they actually make a payment." (Mattioli Woods Plc v. HMRC [2022] UKFTT 179 (TC), Judge Anne Scott)
- Existence of 'payment' depends on practical, business reality, including any composite transaction
"I agree with the Court of Appeal that in no real sense did the vendor receive that payment at the date when a receipt for it was given. As Russell L.J. expressed it: "It was part of the scheme and agreement that the draft should be at once used for the benefit of the purchaser in the manner there set out, and that the vendor should not in fact receive payment for the shares save in the deferred manner provided by the devised machinery."
Counsel's reflection that the transaction had the features of a "pantomime" was not uncharitable." (Greenberg v. CIR 47 TC 240 at 278)
"[82]...The question whether a "payment" is made for these purposes should be answered by looking at the practical, business reality of the transaction, including any composite transaction of which the payment forms part. If the intended purpose and effect of the transactions is that money leaves the scheme and is placed at the free disposal of the member, the mere fact that the money may be subject to an equitable obligation to restore it to the scheme will not prevent it from being a "payment" in the ordinary sense of that word. To conclude otherwise would deprive the charge to tax of effect in many of the most egregious cases where it is most needed." (Clark v. HMRC [2020] EWCA Civ 204, Henderson, Bean, Nicola Davies LJJJ)
- Circular borrowing from lender to pay interest was payment because purpose of legislation was to produce symmetry between liability (for recipient) and deduction (for payer)
"[37] The need to avoid sweeping generalisations about disregarding transactions undertaken for the purpose of tax avoidance was shown by MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311in which the question was whether a payment of interest by a debtor who had borrowed the money for that purpose from the creditor himself and which had been made solely to reduce liability to tax, was a “payment” of interest within the meaning of the statute which entitled him to a deduction or repayment of tax. The House decided that the purpose of requiring the interest to have been “paid” was to produce symmetry by giving a right of deduction in respect of any payment which gave rise to a liability to tax in the hands of the recipient (or would have given rise to such a liability if the recipient had been a taxable entity.) As the payment was accepted to have had this effect, it answered the statutory description notwithstanding the circular nature of the payment and its tax avoidance purpose." (Barclays Mercantile Business Finance Ltd v. Mawson [2004] UKHL 51)
- Vendor received payment in full even though vendor agreed to lend part of purchase price back to purchaser
Reference was made to Ramsden v. Inland Revenue Commissioners (1957) 37 T.C. 619. As appears clearly from p. 625 in that case, the relationship of vendor and purchaser with regard to a certain sum was not to be treated as converted into the relationship of lender and borrower with regard to it, as it was held that there was nothing in the circumstances of that case (as there is here) to extinguish the relationship of vendor and purchaser and replace it by the relationship of lender and borrower.
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Further, the case stated in paragraph 3 states that a partner in the firm of the taxpayer's auctioneers “stated … that the transactions evidenced by the documents were the transaction which it had been intended should be carried out,” and the case stated in paragraph 7 records the commissioners' decision in these words:
“On the evidence presented to us, there was no intention on the part of the vendor to dispose of the property on the basis of a sale by instalments or indeed on any basis other than the sale and mortgage arrangement under which he, the vendor, ceased to be the owner of the property and the purchasers became such.”
So, the taxpayer's first main proposition, in my view, fails." (Coren v. Keighley [1972] 1 WLR 1556 at 1561 Ungoed-Thomas J)
- "Payment" is amount net of VAT
"[51] This suggests that the legislation is directed at payments which result in an actual economic loss to the pension fund. A payment of VAT which can be reclaimed by the pension fund does not result in an economic loss to the pension fund.
[52] For these reasons, we agree with the Appellants, particularly by reference to the purpose of the legislation that “payment” in this context should not include any recoverable input tax." (Morgan Lloyd Trustees Limited v. HMRC [2023] UKFTT 355 (TC), Judge Short)
- "Payable to" may require outright payment
"The only way in which any part of the sums which the Paris trustees got under the settlement could become in any sense "payable to or applicable for the benefit of" the Vesteys would be by means of a loan to them. If I am right in thinking that the Vesteys' power to direct investment of the settled fund, was of a fiduciary character than no loan could lawfully be made of the trust funds to the Vesteys except at a commercial rate of interest. I do not think that such a loan could come within the scope of Section 38 (4), especially as loans are separately dealt with in Section 40. I find it impossible to hold that a sum of money lent at a commercial rate of interest is "payable to or applicable for the benefit of" the borrower in the sense of this Section." (Vestey v. IRC 31 TC 1 at 121)
- Tax 'payable' on a transaction may refer to how much should be paid, not how much is paid
"[107] Although there is no equivalent in this case to the closure notice referred to by Lewison LJ, the second reason he gave, and the reason given by Patten LJ, applies equally here. In the absence of any attempt to persuade us not to follow the approach of the Court of Appeal in Project Blue I will therefore apply the same approach in what follows." (The Tower One St George Wharf Limited v. HMRC [2025] EWCA Civ 1588)
"[52]... The second is that 'payable' does not have a single meaning. It may mean 'due for payment', or 'accruing due' or 'liable to pay'. In the context of section 75A(1)(c) I consider it means liable to pay (as that expression is used in section 85(1)). I do not consider that a mistake by HMRC in issuing a closure notice to one taxpayer can of itself impose liability on a different taxpayer if that is the reason why section 71(1)(c) is engaged." (Project Blue Limited v. HMRC [2016] EWCA Civ 485, Lewison LJ)
Identity of recipient
- Payment for person's benefit may be regarded as payment to them
"It is common ground that the words “to a beneficiary” cannot be construed literally. They must include, for example, payment of a minor's school fees or payment of his debts." (Inglewood v. IRC [1983] STC 133, CoA)
"But on any view s 17 cannot be literally construed. Literally construed s 17 does not apply to the case where trustees of a conventional discretionary trust exercise their discretion in favour of a beneficiary by applying income for his benefit, for instance by paying rates on property which he occupies. The sum paid does not become the income 'of the person to whom it is paid, but becomes the income of the person for whose benefit it was paid. But s 17 must clearly have been intended to apply to such a case. It must, I think, equally clearly have been intended to apply to the case where the trustees of a conventional discretionary trust exercise their discretion in favour of a beneficiary by an irrevocable resolution to pay a given sum to him but at his request retain it in their hands. In both cases there is something analogous to a payment (that is, an irrevocable exercise of a discretion) as a result of which income falls to be treated under ordinary principles of tax law as part of a beneficiary's total income. I see no reason why the references to 'payment' should not be similarly read as covering the case where a beneficiary becomes indefeasibly entitled to require trustees to pay him income because when it arose he had a vested interest in it subject to a power to accumulate it or to divert it to another person or purpose and the power has expired or has been released or abandoned." (IRC v. Berrill [1981] STC 784 at 798, Vinelott J)
But sums paid to company and credit to settlor's loan account with company held not paid to settlor
"The question, then, is whether the sums with which the settlor was debited in current account with the company were capital sums paid directly or indirectly by the company to him. This they would be if they were sums paid to him by way of loan or repayment of a loan, or were sums paid to him otherwise than as income which were not paid for full consideration in money or money's worth. These are true alternatives and I will consider the latter first. I cannot doubt, and the matter was not seriously contested by the respondents, that the sums in question having been paid at the request of the settlor and upon his promise express or implied to repay, there was full consideration given by the settlor for the payment. Some suggestion was made that, inasmuch as there was no provision for payment of interest, there was not full consideration. But that was an arrangement which was no doubt convenient to both parties. Though latterly the company was largely in credit, in the earlier years it had been the other way about and no interest was charged against the company. In my opinion this contention fails.
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That question remains as I have stated it, and my answer is that according to the ordinary fair meaning of the words the company did not pay any sums to the settlor by way of loan. It would in fact be as inapt to say that the company paid him sums by way of loan when he was in debit on the account as to say that he paid the company sums by way of loan when he was in credit. Some stress was laid on the distinction in the old forms of pleading between the plea for money lent to the defendant and the plea of money paid at the request of the defendant to a third party. I am not inclined to give much weight to this consideration but it does indicate that there is at least a formal difference between the two transactions." (Potts v. IRC [1951] AC 443 at 455 (HoL))