Court of Appeal confirms loan from EBT does not constitute taxable earnings

In HMRC v M R Currell Ltd [2026] EWCA Civ 445, the Court of Appeal (CoA) upheld the decision of the Upper Tribunal (UT) and confirmed that a genuine loan, which was expected to be repaid, did not constitute taxable "earnings" under section 62, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

Background

M R Currell Ltd (the Company), a painting and decorating business, was originally established by Mr Mark Currell (Mr Currell). It was later run alongside his wife, Mrs Kimberly Currell (Mrs Currell).

On 25 November 2010, a payment of £800,000 (the Payment) was made by the Company to an employee benefit trust (EBT). Mr Currell entered into a loan agreement with a trustee of the EBT, pursuant to which it agreed to lend him £800,000 for a five-year term (the Loan). Mr Currell planned to use the Loan to purchase "A" shares in the Company. The Loan was secured by a charge on Mr Currell's interest in the shares. 

HMRC made determinations on the basis that the Payment constituted taxable earnings of Mr Currell and therefore the Company was liable to income tax and national insurance contributions in respect of those earnings. 

The Company appealed to the First-tier Tribunal (FTT).

The dispute turned on whether the Payment constituted earnings under section 62, ITEPA 2003.

FTT decision

The appeal was dismissed. 

The FTT considered that the main issue was whether the "sole or a substantial reason" for the Payment was that it was a "reward or benefit" for Mr Currell's services as an employee or director of the Company. In finding that it was inevitable that the Payment would result in an equivalent loan to Mr Currell, the FTT proceeded to consider whether a genuine loan of money with real repayment obligations could comprise a reward or benefit. The FTT held that it could, as a matter of legal principle, but whether it did would depend on the reasons for the Loan. On the facts, the FTT found that the Loan was made to reward Mr Currell for his work in the business and, therefore, the Payment comprised earnings.

The Company appealed to the UT.

UT decision

The appeal was allowed. 

The UT disagreed with the FTT's reasoning and held that as Mr Currell had a genuine obligation to repay the Loan, its payment to him could not constitute a payment of earnings. 

HMRC appealed to the Court of Appeal.

CoA judgment

The appeal was dismissed.

HMRC argued that the Company's case was on all fours with the Supreme Court's decision in RFC 2012 plc (in liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] STC 155 (Rangers), but the CoA disagreed. It noted that in Rangers there was no dispute as to whether payments to the trust were remuneration, which was the issue in the present case. The CoA also distinguished the present case from Rangers on its facts. In Rangers, no security was taken in respect of the loans, and there was no expectation of repayment, unlike in the present case.

HMRC put forward the following two main arguments as to why the Payment was earnings:

1) the Payment was made to fund the Loan, and therefore it (in addition to the Loan) was for work that had been carried out by Mr Currell.

2) the Payment was earnings as the overall arrangement provided Mr Currell with tax-free access to £800,000 in circumstances where he had previously been under-rewarded for his work. 

The CoA rejected both arguments. 

Whilst the CoA accepted that the Loan was provided because of Mr Currell's work, the Payment was not a reward for services merely because it funded the Loan. The CoA noted that all loans provide access to cash, but this is crucially subject to a repayment obligation. 

The CoA concluded that, in general, the advancement of a loan will not amount to a payment of earnings in the amount of the principal of the loan. However, it did not exclude the possibility that the advancement of a purported loan could amount to a payment of earnings where the loan is a sham or where it was never intended that it should be repaid, such that the true agreement is not one of a loan. 

Comment

The CoA acknowledged in its judgment that if the transactions had been implemented only a short time after they were, the charge HMRC sought to impose would have arisen on the Loan under Part 7A, ITEPA 2003 (commonly referred to as the disguised remuneration rules), which was introduced by Finance Act 2011.

Significantly, Lady Justice Faulk (who delivered the leading judgment) commented that HMRC should be cautious to avoid the "risk of over-reach" in respect of some of its arguments that had the potential to undermine legal certainty. For example, the argument that the principal of a loan was taxable as earnings simply because it was paid via a third party or that a loan can be earnings merely because the borrower had practical control of its repayment.

The CoA's decision in this case is a salutary reminder to HMRC that it does not follow from the Rangers decision that all loans made by an EBT to an employee or director constitute the redirection of their earnings. Each case must be carefully considered and determined on its own particular facts. 

Read the judgment in Mr Currell Ltd.