A non-dom banker, financier and entrepreneur has lost his appeal against a tax bill of £675,000 on £1.5m of foreign income brought to the UK.
The Benoît d’Angelin v HMRC case is not only interesting because of the amount of tax involved – but because it appears the taxpayer didn’t heed the advice of his legal advisers ahead of making his investment.
Here, we look at the tax dispute and share our advice for taxpayers and tax advisers about dealing with complex tax affairs and offshore matters.
Background to the d’Angelin v HMRC case
In 2016 Mr d’Angelin was UK resident but not UK domiciled. He introduced £1.5m of his foreign income to a UK company that he’d recently founded and of which he was at that time the sole director. This investment was made, with legal advice, in the expectation it would qualify for Business Investment Relief (BIR), and so wouldn’t be taxable.
The company gave Mr d’Angelin a director’s loan account (DLA). Mr d’Angelin used that account, drawing against it to pay (amongst other things) personal expenses. The balance eventually stood at about £71,000.
After an enquiry, HMRC concluded that the loan account constituted an ‘extraction of value’, contrary to the ‘Remittance Basis’ provisions in Part 14 of the Income Tax Act (ITA) 2007. They denied BIR in relation to the entirety of the £1.5m that had been invested. That led to an increase in Mr d’Angelin’s tax payable of about £675,000.
Mr d’Angelin’s tax appeal
Mr d’Angelin appealed to the First-tier Tax Tribunal (FTT) against HMRC’s Closure Notice. The Notice had concluded that, in relation to the DLA between Mr d’Angelin and a limited company registered in England and Wales – known as ‘d’Angelin and Co Ltd’ (DCL) – there had been an omission of employment benefit from the Appellant’s tax return, and so extra tax was due of £675,307.35.
Mr d’Angelin argued that:
- On a proper interpretation of the legislation, the extraction of value rule wasn’t breached because a receipt of value must mean a receipt of net value.
- There was no extraction of net value because the provision of interest-free credit by an employer to an employee is treated as carrying interest on loan equal to the cash equivalent.
- But in any event, the DLA was provided to Mr d’Angelin in the ordinary course of business and on arm’s-length terms within the proper meaning and effect of the exception in ITA s809(3).
The key issue in the case was whether Mr d’Angelin breached the so-called ‘extraction of value’ rule.
The tribunal’s decision
The First-tier Tax Tribunal pointed out that, in Mr d’Angelin’s circumstances, the regime could perhaps be seen as having operated in a way that was “harsh”. But it said that was simply the result of the provision that extraction of the value of any part of the remitted income renders the entirety (and not simply the extracted part) taxable. It added that, in that sense, the Relief is fragile, and easily lost.
The FTT said: “In our view, the circumstances of this appeal – Mr d’Angelin making an investment, claiming BIR on that investment, but using money from the Company (repeatedly, and over a significant period of time) for personal expenditure – are, in our view, the very mischief at which the extraction of value rule is aimed. The consequence is that the Relief is lost.
“It seems to us that the irreducible fact is that the Appellant, through his own actions (it makes no difference whether these were deliberate, or careless, or done in the face of advice to the contrary) took the £1.5m out of the Relief and into charge.
“In its ‘View of the Matter’ letter, HMRC made it clear that they were not saying that there had been a deliberate attempt to extract value from DCL, and no such allegation was made before us. But HMRC said that ‘there has been a failure to adhere to the requirements of the legislation and as a result a potentially chargeable event has occurred’. We agree.”
In reaching its conclusion, the FTT said the fact Mr d’Angelin was expressly (and, in their view, clearly) told by his legal advisers, before making the investment, that ‘use of the company’s assets personally’ would be treated as an extraction of value, leading to denial of the Relief is a neutral factor.
The tribunal added: “The receipt of advice does not tell against the Appellant because there is no knowledge or culpability element in the availability or denial of the Relief. The Relief is either available, or it is not. Here, it is not.”
In dismissing the appeal, the FTT ruled there was an extraction of value within the proper meaning and effect of the legislation, which was not within the exemption.
Our thoughts on the D’Angelin v HMRC case
Given how wide reaching the remittance rules are in the UK, the outcome of this appeal is of little surprise.
However, what’s clearly apparent in this case is that while Mr d’Angelin took steps to ensure the remittance wouldn’t be taxable, he didn’t follow the advice when implementing the structure. Borrowing from the company via his loan account opened up the whole transaction to challenge by HMRC.
It may be that Mr d’Angelin didn’t realise the implications of what he was doing at the time. But this case illustrates the importance of ensuring clients fully understand the advice they’re given. And also that they implement the transaction (including ongoing running of the company in this case) in a way that ensures the Relief isn’t lost.
Our advice for taxpayers
It’s crucial to get advice if your tax affairs are complicated. But it’s not enough to simply seek that guidance – you must also make sure you understand it and apply it on a day-to-day basis.
Advisers can give advice based on your circumstances, but if you then alter those circumstances, it can have a significant impact on the guidance that was provided.
So, if there are any major changes in your situation after you’ve received advice, it’s vital to get advice again.
How can tax advisers and accountants help their clients get their taxes right?
Tax advice shouldn’t be viewed as a standalone, one-off piece of work. Instead, it’s something that naturally evolves.
That’s why it’s crucial for your clients to understand the advice they receive. And if a transaction is ongoing (such as in the d’Angelin v HMRC case), they need to know what they can and can’t do – and recognise trigger points that may require an update to the original advice given. Otherwise, there could be negative consequences.
The key to advisory work is in the implementation. No matter how good the advice, it will fail if it’s not implemented correctly.
Professional advice on non-dom tax and other complex tax matters
At Churchill Taxation, we have many years’ experience dealing with offshore structures, non-domiciled individuals, and non-resident people and companies.
We can also help with HMRC tax enquiries and investigations – and we offer a tax expert witness service.
Contact our specialist tax consultants today on 01902 585 311 or email stephanie.churchill@churchilltaxation.co.uk
