Interest free loans to employees as earnings?

The Court of Appeal has emphasised that a loan to an employee will not normally amount to a payment of earnings (in the absence of the application of the disguised remuneration rules) in a case involving the payment of monies to an EBT and an interest free loan from the EBT to a director owner: HMRC v Currell [2026] EWCA Civ 445. The FTT in this case had been wrong to consider that the payment of monies to the EBT amounted to a payment of remuneration and this scenario could be distinguished from the Supreme Court decision in Rangers.

Although the decision on the facts is largely of historical interest, since further anti-avoidance legislation has since been brought in, the Court of Appeal decision remains of interest in setting out the correct analysis of the Supreme Court decision in Rangers and in highlighting that the provision of a loan per se to an employee will not generally be earnings in the amount of that loan.

Background

The case concerned arrangements put in place by MR Currell Ltd. It established an employee benefit trust (EBT) in 2010 to provide benefits to employees. The company contributed £800,000 to the EBT and at the same time Mr Currell (who owned 31% of the company) requested a loan of £800,000 to buy A shares in the company. The EBT provided Mr Currell with the loan on interest free terms with a five year term. Mr Currell then bought A shares in the company from his wife for £800,000 and his wife then loaned the monies back to the company. Although the loan was repayable after five years, it was not in fact repaid at that time since HMRC raised an assessment on the original payment and the EBT was concerned that recalling the loan a reusing it for employee benefits might result in double taxation.

The FTT found that all these arrangements were "pre-wired" and although the loan was a genuine loan with security (in the form of the A shares) and the payment did not replace earnings that would otherwise have been paid, held that the arrangements resulted in a payment of earnings based on the authority of Rangers. In particular, the FTT said that: "In summary, therefore, it is our view that as a matter of law there is nothing which prevents a genuine money loan on commercial terms conferring a benefit on the borrower. It is our view that in the vast majority of cases in practice, such a loan will confer a benefit. And in the context of this case, the Loan conferred a benefit on [Mr Currell]. Its payment to [Mr Currell], therefore, was potentially within the ambit of section 62 ITEPA. Whether it was earnings depends on the substantial reason for its payment."

The Upper Tribunal held that the FTT had erred in law in this statement and HMRC appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal agreed with the UT that the FTT's conclusion that the advance of what it had found to be a genuine loan with a real repayment obligation constituted earnings, subject only to a consideration of the reason for its payment, was an error of law.

The Court has held that a loan will not amount to a payment of earnings, at least in the amount of the principal of the loan. Since the loan is subject to a repayment obligation, the benefit is limited to the use of the funds and that is something taxed under the provisions dealing with loans to employees under ITEPA Part 3 Chapter 7. In addition, benefits in kind are only taxable as earnings if they can be turned to account and in this case the benefit in the form of use of monies does not fall into that category. The Court did not entirely exclude the possibility of a loan, in some limited circumstances, amounting to a payment of earnings, for example in the case of a sham or where it was never intended that the loan should be repaid. This case, however, involved a genuine loan with no finding that it would not be required to be repaid.

The Court went on to distinguish the Supreme Court decision in Rangers from this case. The Court noted that the issue in Rangers was whether a payment that is remuneration is taxable as an emolument or earnings when paid to a third party in circumstances where the employee has no prior entitlement to it. In Rangers, the nature of the contractual arrangements entitling footballers to payments (including side letters) and the nature of the executive bonuses was such that is was not an issue that the payments into the EBTs were themselves earnings. In this case, that was the very issue in this case. As such, Rangers was of limited relevance and assistance.

In any event, in this case the loan may have been made to reward work done, but that was insufficient to turn the payment to fund it into an emolument. As the Court pointed out: "The fact that the Loan was made "because of the work which [Mr Currell] had done"... does not turn a payment made to fund it into an emolument. Yes, the FTT (in effect) found that the Loan was a benefit arising from Mr Currell's employment. But the Payment was not an emolument simply because it funded that benefit." Whether the payment itself had the character of remuneration is a separate question to whether the loan it funded was remuneration. The Court pointed out a number of logical consequences to HMRC's argument, including its inconsistency with earlier caselaw (such as Wilkins v Rogerson) and an employer putting a third party in funds to provide employees with season ticket loans resulting in the payment to the third party being taxable emoluments of the employees.

Comment

The Court was particularly critical of HMRC's "over-reach" in this case and its failure to consider the far reaching consequences of its arguments that the provision of a loan per se may amount to an emolument of the full amount of the loan and that a payment to a third party to fund such an arrangement may itself be an emolument.

The FTT had accepted that the loan in this case was genuine, the trustees independent and there was no intention not to repay it (it was not actually repaid after five years but the court accepted that the reason was that since the arrangements were under investigation, there was a concern that if repaid to the EBT and then reused there would be double taxation). As such, unlike Rangers where there was no intention for the loans to be repaid and the beneficiaries took control of the relevant trusts, the provision of the loans in this case was not the payment of earnings. That could not be changed by the fact that payments were made to the employer into the EBT in advance to fund those loans.

It should be noted that HMRC has since introduced anti-avoidance legislation in Part 7A ITEPA (the disguised remuneration rules) in order to prevent directors and employees accessing tax free cash from a company in this way, which (if the arrangements had been implemented later) would have caught them.