Mr X, originally from Spain and residing in Italy, faced a significant tax bill from HMRC after investing £1.5 million of his foreign income into his UK-based company.
The investment was intended to qualify for business investment relief, exempting it from tax. Business Investment Relief (BIR) is a potentially valuable tax relief for UK taxpayers, particularly non-domiciled individuals (non-doms), who have used or are currently using the remittance basis. BIR enables these remittance basis users (RBUs) to invest their offshore income and gains in the UK without incurring taxes on those remittances. In this particular case, however, complications arose when he used a director’s loan account for personal expenses. A director’s loan is money withdrawn from your company’s accounts that does not qualify as salary, dividends, or legitimate expenses.
Mr X accumulated £75,000 in personal expenses through a director’s loan account, which included costs such as hiring private jets, an iTunes subscription, and gifts for his wife. HMRC viewed this as an “extraction of value” in breach of the remittance basis. Consequently, HMRC denied the business investment relief for the entire £1.5 million and issued a tax bill of £675,000.
In response to the tax bill, Mr X appealed, arguing that the legislation should be interpreted as requiring the net extraction of value to breach the rule. It was claimed that the director’s loan was provided in the ordinary course of business. HMRC maintained that any extraction of value, not just net, constituted a breach.
A tribunal judge sided with HMRC, ruling that the legislation did not specify net extraction of value. The tribunal found that Mr X had received value in the ordinary course of business and that personal use of company funds was exactly what the extraction of value rule was designed to prevent. Despite the client’s claims of following legal advice, the appeal was dismissed, and he was held liable for the full £675,000 tax bill.
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