Flashman v Revenue & Customs (CGT - Qualifying loan under)

Factual and Procedural Background

This appeal arises from a closure notice issued by HM Revenue and Customs (HMRC) on 13 October 2017, confirmed on review on 12 March 2018, denying the Appellant's claim for an allowable loss of £100,000 under section 253 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) relating to a qualifying loan. The claim was made in the Appellant's 2014/15 self-assessment tax return.

The Appellant, an experienced oil derivatives trader operating on his own account, was introduced to a director of a company named Emerging Markets Investment Ltd by a former colleague. Following meetings in early 2010, the Appellant made a payment of approximately £130,000 to Emerging Markets Investment Ltd. In 2011, he was informed the company had financial difficulties, and in 2013 he received a partial repayment of £30,000. The Appellant contended the payment was a qualifying loan, resulting in a loss of £100,000.

HMRC conducted an investigation into the tax return, during which the Appellant's agent communicated that the loss related to an investment in a telecommunications project and disclosed an omitted capital gain. HMRC concluded that no qualifying loan had been made as the monies were invested rather than loaned for the purposes of a trade. The Appellant appealed against the closure notice.

Legal Issues Presented

1. Whether the payment made by the Appellant to Emerging Markets Investment Ltd constituted a qualifying loan under section 253(1) TCGA 1992.
2. Whether the Appellant is entitled to claim an allowable loss of £100,000 for capital gains tax purposes arising from this transaction.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that the payment was a qualifying loan to a trader, specifically to EMI Wealth Ltd or Emerging Markets Investment Ltd, both associated with the telecommunications trading scheme.
• He argued that the loan was high-risk but compensated by projected monthly interest returns.
• The supporting documents should be interpreted commercially despite the absence of a formal loan agreement.
• The Appellant asserted that EMI Wealth engaged in trading activity related to the mobile phone routing charges scheme.

Respondents' Arguments (HMRC)

• HMRC argued that no qualifying loan was made as defined by section 253(1) TCGA 1992 because the monies were invested rather than lent for the purposes of a trade.
• They submitted that EMI Wealth Ltd and Emerging Markets Investment Ltd were marketing consultancies, not trading companies, and did not carry out any trading activity.
• HMRC maintained that any trading activity was carried out by a third party, a company named Telco, not by the entities to which the Appellant made payments.
• They emphasized that the Appellant did not acquire an asset other than currency (sterling), which is excluded from chargeable assets for capital gains purposes.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal examined the nature of the payment made by the Appellant and the activities of the companies involved. It found that both EMI Wealth Ltd and Emerging Markets Investment Ltd were UK-registered companies primarily engaged in marketing consultancy rather than trading activities. The evidence showed that these companies were controlled by the same individual and were used interchangeably in communications.

The Tribunal noted the absence of any documentation evidencing trading activity by these companies or a formal loan agreement. It accepted HMRC's submission that any trading was conducted by a separate entity, Telco, and that the Appellant's payment was an investment rather than a loan made for the purposes of a trade carried on by the borrower.

Further, the Tribunal acknowledged that the Appellant received only currency (sterling), which does not constitute a chargeable asset under the TCGA 1992 for capital gains purposes. Even if an asset had been acquired, the Tribunal found no qualifying loan had been made under section 253.

Accordingly, the Tribunal concluded that the Appellant did not satisfy the statutory requirements for relief under section 253 TCGA 1992.

Holding and Implications

The Tribunal DISMISSED the Appellant's appeal.

The direct effect of this decision is that the Appellant is not entitled to claim an allowable loss of £100,000 for capital gains tax purposes in relation to the transaction. No new legal precedent was established by this decision.