Employee loans: FTT rejects HMRC claim to aggregate multiple loans

Fri 25 Apr 2014

The case of Elizabeth Amri (EA), concerned an employee of HBOS who had two loans provided by her employer, Halifax Bank of Scotland.

She applied for an employee loan to cover her house purchase but the amount available under the employee loan scheme was not enough to cover the borrowing required. Therefore she also took out a separate loan from the bank on the same terms as were offered to its normal customers, giving her:

• a specific employee loan on preferential terms; and
• a normal tracker mortgage identical to those offered to the general public.

However, because the tracker mortgage followed LIBOR the rate if interest charged was less than the official rate. HMRC had made an agreement with HBOS that where employees had both “employee” and “customer” loans, all their loans would be aggregated, treated as employee loans and entered on the P11D as such. It is unclear why HBOS had made this agreement with HMRC.

This meant that the difference between EA’s actual interest on her customer loan and the official rate was entered as a taxable BiK on her P11D.

EA failed to include any loan benefit in kind (BiK) on her tax return and HMRC opened an enquiry. Once the enquiry was open she accepted that the employee loan created a taxable BiK. The dispute centred on the treatment of her customer loan because HMRC insisted that both loans should be aggregated for the purposes of s 175 ITEPA 2003. HMRC accepted that if an employee’s only loan was a customer loan the exemption in s 176 for loans made in the course of the employer’s business on the same terms as offered to the public applied and there could be no BiK charge at all. However, in EA’s case they claimed that the borrowings had to be treated as a single facility that was split into two and because part of the arrangement did not fall within the s 176 exemption the whole of the borrowing was subject to s 175.

Common sense prevailed and the FTT did not find that this amounted to a single loan arrangement. The tribunal was satisfied that the loans were discrete and there was nothing in s 173-175 that could require multiple, separate loans to be treated as a single borrowing arrangement.

Therefore EA’s appeal was upheld: she was not taxable on her customer loan, only on the employee loan.