UK vs CJ Wildbird Foods Limited, June 2018, First-tier Tribunal, case no. UKFTT0341 (TC06556)

« | »

In the transfer pricing case of C J Wildbird Foods Limited the issue was whether a related party loan should be treated as such for tax purposes.

There was a loan agreement between the parties and the agreement specified that there was an obligation to repay the loan and interest.

However, no interest had actually been paid and a tax deduction had also been claimed by the tax payer on the basis that the debt was unlikely to be repaid.

The tax authorities argued that the loan did not have the characteristics of a loan. The borrower was loss making  and did not have the financial capacity to pay any interest.

The tribunal found that there was a legal obligation to repay the loan and interest. Whether the loan or interest was actually repaid was irrelevant.

The modern business world has many famous examples of companies, especially in the technology sector, with no cash and no immediate prospect of generating a profit which go on to be very successful. Clearly the appellant considers BFL potentially to be such a company and is therefore prepared to subsidise its running costs by way of loan for the time being in the hope of obtaining repayment of some or all of its loans in due course, possibly with a gain on its share investment as well.

As to the “hallmarks” that Mr Baird asks me to consider, there is no requirement that for a loan relationship to exist, interest must be charged; were it otherwise, many perfectly normal intra-group loans would fall foul of that requirement (and in any event, the loans in this case include a contractual obligation to pay interest, albeit an obligation that has not yet been enforced). Nor is there any requirement that, for a loan relationship to exist, the lender must have any degree of certainty that the debt will be repaid normal commercial loans are inherently hedged about with uncertainty about whether repayment will be made and save in degree, the present situation is no different. Lack of a fixed repayment date for a loan is perfectly commonplace. Here, the money has been advanced by the appellant on terms that it is all to be repaid. The fact that such repayment has not been made and HMRC may have formed the opinion that these payments will never be repaid is beside the point. The loans have been advanced as a matter of arm’s length negotiation between the two parties, there is an obligation to repay (as recognized by both companies in their respective audited accounts and  confirmed in evidence), and the fact that the appellant may well not recover some or all of its money is neither here nor there. It has made a commercial judgment that it is in its best interests to continue to support BFL by continuing loans, and the fact that HMRC may disagree with that judgment is irrelevant to the underlying nature of the transaction. Ultimately it may turn out that the appellant’s business judgment was overly optimistic, but that is of no relevance.

It follows that I find the transactions in question to amount to loan relationships…

Hence, the tribunal found in favor of the taxpayer.

 

TC06556

Related Guidelines

Leave a Reply

Your email address will not be published. Required fields are marked *