The case concerned a businessman who gave up his financial services career to found a high-end interior design company. Despite his best efforts, the business never hit the big time and made consistent losses, totalling more than £450,000 over a five-year period. Apart from £1 in share capital, all the money that had kept the company afloat came from the businessman by way of loans.
After he wrote off £350,000 of the money owed to him by the company, he argued that that gave rise to an allowable loss for CGT purposes by virtue of Section 253(3) of the Taxation of Chargeable Gains Act 1992. That claim was, however, rejected by HM Revenue and Customs (HMRC).
In allowing the businessman’s appeal against that decision, the First-tier Tribunal (FTT) found that the written off portion of the loans was, in reality, irrecoverable. Although he had at the relevant time still fostered a dim hope that the company’s fortunes would improve, the businessman had genuinely believed that there was only a very remote possibility of the money being repaid.
Far from being an attempt to contrive an allowable loss, he had had written off the £350,000 as part of his plan to wind down the business in an orderly fashion, ensuring that all creditors were paid. Given the company’s loss-making record and lack of assets, HMRC’s argument that it could have borrowed money from a bank in order to repay the businessman was fanciful.
The conclusion that the loan was irrecoverable was supported by the fact that the company continued to make losses until its dissolution. The economic loss to the businessman was real and the FTT noted that, had he chosen to fund the company with equity capital, rather than loans, he could have made a negligible value claim and generated a loss exceeding £350,000.