Payment effected by bookkeeping entry

[1eyedjack]

Good morning.
I work in an accountancy practice in the UK and I am trying to find case law to support the proposition that where a "payment" is required in order to for a statutory provision to be relevant, a book-keeping entry may be sufficient to achieve it.
By way of background, a director and shareholder of a close UK trading company maintains a loan account with his company which at one point became overdrawn (which is to say that the director owed a balance to the company).
The director sought to avoid a personal taxable benefit by paying interest to the company at the "official rate".
The interest was charged to his director's loan account monthly and credited to the company's profit and loss account.
Periodically lump sum credits to the loan account were achieved by voting company dividends (and salaries) which were not drawn down in the form of cash.

There are a few principles that are not in dispute:
A benefit in kind is chargeable where a loan is obtained from an employer at a beneficial rate
The beneficial rate is the excess of the HMRC published "official rate" over the interest rate reimbursed by the employee.
In order that interest reimbursed by the employee can be taken into account two conditions must be satisfied:
1) there must at the time that it accrues exist an obligation on the employee to pay the interest
2) that interest must actually be paid (although not necessarily in the year).

In my case, HMRC are attacking both conditions.

On the first condition, HMRC advise that in the absence of a director's board minute establishing a liability there was no obligation to pay. I intend to refute this on the grounds that except in the case of transactions in land a contractual obligation need not be evidenced in writing, and our client is prepared to give evidence under oath of an existing obligation. I also intend to cite Re Duomatic Limited [1969] 2 Ch 365. Although it was not the original reason for my post if anyone has anything to add to this I should be grateful. As a last resort, I would hope that in the absence of any evidence either way, the fact that interest was actually charged in the year (and habitually so over some years) might of itself be evidence, albeit not conclusive evidence, of an existing obligation. Evidence need not be conclusive, only sufficient to sway a tribunal. [Late Edit: That said, I now note that in addition to transactions in land, certain credit agreements have to be evidenced in writing in order to be considered binding contracts. Would this be one of them?]

On the second condition HMRC advise that the monthly debits to the loan account do not represent "payment". They cite Paton (as Fenton's Trustee) v CIR [1938] (21TC626). I find this hard to refute, but it may not be necessary as I intend to submit that the lump sum credits to the loan account discharge the payment, not the debits.

I was doing a search of CCH and Lexis-Nexis manuals a month or so back and I came across a case in which Vinelott J commented expressly that a book-keeping entry may be regarded as a "payment". I have spent hours trying to find that case again without success. Does anyone out there know of it? Otherwise I intend to rely on Garforth v Newsmith Stainless Ltd [1979] STC 129.

I am wondering whether a problem may yet emerge from the fact that lump sum credits do not by themselves clearly identify as repayments of interest contrasted with capital (or a mixture, ie pro rata). This may be relevant where the credits are not wholly sufficient to restore the loan account to a net credit balance. Again, Re Duomatic may help, as well as Devaynes v Noble, Clayton’s Case 1816, Merivale’s Reports, Chancery, Vol 1, 572. But there may be some other case in which unidentified receipts may be deemed to be on account of interest before capital? Any pointers would be a help. This may have been addressed in cases where a non-domiciled individual remits mixed funds to the UK from an overseas source.

Looking forward to any comments. Clearly the client could in this case have been better served by a more rigorous paper trail from the outset, but we make the best of what we have.

PS. I am not even sure if this forum is appropriate for UK jurisdiction queries. Presumably there is some indication on the forum but I could not find it in the FAQ

[liveirisjul]

The director sought to avoid a personal taxable benefit by paying interest to the company at the official rate? Might not good enough...

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