The case of Garrett Paul Curran v HMRC TC 2194 provides an interesting review of the meaning of interest and its deductibility for tax purposes. The facts were comparatively straight forward. Mr Curran took out a loan for 30 years. He was naturally obliged to pay interest on this loan but the opportunity arose for him to pay the interest earlier than originally agreed at a discount to reflect early payment.
HMRC claimed that what Mr Curran paid was not interest – it was a payment in lieu of interest and therefore was a capital payment.
In a long judgment, the Tribunal examined the nature of interest, observing that there is no real statutory definition (only a circular definition as being “annual or yearly interest and interest other than annual interest). However, there are authorities of enormous weight to the effect that interest is a payment for the use of money or a payment received for the deprivation of money by reference to the period of deprivation.
It is not unusual to find debt and interest described in many different ways, wrapped up in instruments providing for discounts or premiums with a view to avoiding the payment (and receipt) of interest. HMRC are pretty alert to identifying receipts which have the character of payments for the use of money and charging them to tax as interest.
However, on the basis of this case, all those complications in re-categorising interest would be completely unnecessary. All that would be needed is for the taxpayer to pay the interest in advance and HMRC would have accepted it was a capital payment and not interest. Somehow I don’t think so.
The Tribunal did not think so either. There was no doubt on the facts or the law that this was plainly a payment of interest and it is a surprise that HMRC argued to the contrary. Indeed you only have to consider the likely response had the taxpayer claimed that this was not a payment of interest but a capital payment (which would obviously not be taxable). HMRC clearly did not want this payment treated as interest but even if it were interest, they did not want to allow a tax deduction for it. They sought to invoke Section 787 Taxes Act 1988 which denies relief:
“ In respect of any payment of interest if a scheme has been effected or arrangements have been made (whether before or after the time when the payment is made) such that the sole or main benefit that might be expected to accrue to that person from the transaction under which the interest is paid was the obtaining of a reduction in tax liability by means of a deduction computing profits or gains or deduction or set off against income or total profits.”
This provision is now found in Section 809ZG Income Tax Act 2007 but it says substantially the same thing. It is a powerful weapon for HMRC as it provides an objective test about whether “the sole or main benefit that might be expected to accrue” is a tax deduction. This is contrary to the normal test for deduction which relates to the subjective purpose of a taxpayer in incurring the expenditure.
It is mildly surprising that this formulation is not more widely used in the anti avoidance legislation. It is much more usual to see the phrase “the purpose or one of the main purposes for which the transaction or transactions were effected” which is the subjective test applicable to most anti avoidance provisions. This is particularly the case as the objective test goes back a long way, at least to the Finance Act 1944.
Although Mr Curran received tax relief for the interest sooner than he would otherwise have done, the Tribunal also took into account the non tax benefits to him of the early payment. Although the precise reasoning is a little difficult to follow, the Tribunal concluded that tax relief was not the sole or main benefit which might have been expected to accrue to Mr Curran – the non tax benefit outweighed the benefit of the interest relief and the anti avoidance section was not engaged.