The FTT has released decisions dismissing appeals of the taxpayer appellants in a K2 contractor loan scheme appeal (Lowry v HMRC [2026] UKFTT 1297 (TC) – Akash Nawbatt KC and Colm Kelly represented HMRC) and a loan buster scheme appeal (Grand Smile Design Ltd v HMRC [2026] UKFTT 1248 (TC) – Colm Kelly represented HMRC).

Lowry v HMRC

This decision is one of the first appeals where the FTT has considered the question whether payments made directly by an employer (rather than a third party, such as an EBT) to an employee which took the legal form of ‘loans’ were earnings for the purposes of section 62 ITEPA.

Mr Lowry entered into a contractor loan scheme known as K2. Mr Lowry became the employee of a Jersey-resident person or trust (known as K2), which indirectly provided his services to UK end clients. K2 paid him a modest salary from which they deducted income tax and National Insurance contributions (‘NICs’). K2 also made payments of ‘loans’ to Mr Lowry on which he paid income tax and NICs on the beneficial value of the cheap ‘loans’. The right to receive repayment of the ‘loans’ was assigned by K2 to an EFRBS of which Mr Lowry was a beneficiary – the EFRBS trustee therefore being obliged to act in Mr Lowry’s best interests in deciding whether to demand repayment of the loans.

When K2 provided Mr Lowry’s services, they provided them to a UK company known as 3PCL, which in turn provided them to another UK company known as Eclecsys, who provided Mr Lowry’s services to end clients. Mr Lowry had been a director of Eclecsys on incorporation but ceased to be shortly after. His wife remained a director.

The arrangements resulted in Mr Lowry receiving as ‘loans’ roughly 82% of the value of the sums paid by end clients to Eclecsys. The remaining 18% largely represented fees deducted by K2 and 3PCL.

The FTT noted that there was no discernible commercial reason for Mr Lowry to be employed by K2 and for his services to be supplied via 3PCL. While HMRC did not argue that the ‘loan’ agreements were Snook shams, the FTT accepted that it could take a purposive approach to assessing the contractual terms in question, applying Acornwood LLP v HMRC [2016] UKUT 361 (TCC). The FTT found that the repayment provisions of the ‘loan’ agreements were put in place solely for the purpose of enabling Mr Lowry to receive tax-free sums as purportedly repayable ‘loans.’ Even if the repayment provisions of the ‘loan’ agreements could not be disregarded, on a purposive construction of section 62 ITEPA and on a realistic view of the facts, the ‘loans’ were section 62 earnings.

The FTT also upheld HMRC’s conclusion that Part 7A ITEPA applied to the K2 arrangements. Mr Lowry’s position was that there was no ‘relevant third person’ for the purposes of section 554A(1)(d) ITEPA who could take a relevant step, as the ‘loans’ were made directly by K2 (the employer) to Mr Lowry. The FTT accepted HMRC’s submission that 3PCL was a relevant third person which took relevant steps when making payments to K2 and the remaining provisions of section 554A(1) ITEPA were also satisfied.

Grand Smile Design Ltd v HMRC

Dr Keppel had entered into a disguised remuneration gold bullion scheme which resulted in him owing ‘quasi-loans’ to an EBT, of which he was a beneficiary. The quasi-loans were constituted by undertakings to make payments to the EBT at a future date. Dr Keppel was a shareholder and director of the appellant, Grand Smile Design Ltd (‘GSL’).

In order to avoid the application of Schedule 11, Finance (No 2) Act 2017 – i.e. the loan charge – Dr Keppel entered into a further scheme known as the QLC scheme. That scheme involved the EBT borrowing money to purchase shares in GSL from Dr Keppel. It was fundamental to the efficacy of the scheme that the sums used by Dr Keppel to purportedly repay the quasi-loans were ‘payments in money’ and that they were not any connections between the repayments and tax avoidance arrangements.

The arrangements involved the EBT borrowing money from a bank connected with the promoter of the QLC scheme, at zero interest and repayable within ten days, to fund the purchase of the shares in GSD. The sum ‘paid’ by the EBT to Dr Keppel would be offset against his undertakings to make future payments to the EBT. The sums loaned by the bank to the EBT were transferred to the EBT’s solicitors, who then onward transferred the sums to Dr Keppel’s solicitors. Dr Keppel had given an undertaking to pay the sums loaned back to the bank. The loaned sum was paid by Dr Keppel’s solicitors to the bank who acknowledged receipt as agent for the EBT, purportedly reducing Dr Keppel’s obligation to make future payments to the EBT. The loaned sum was never in Dr Keppel’s hands.

The FTT did not accept Dr Keppel’s evidence that there was a purpose in selling his shares in GSL to the EBT other than to avoid the loan charge and that Dr Keppel was following a pre-ordained scheme to generate temporarily available cash. The FTT concluded that the loan charge would not apply where there had been repayment in money in a real-world sense e.g. where there had been a repament from the taxpayer’s own cash, or where the repayment was funded by a commercial interest-bearing loan. The FTT concluded that the overall effect of the QLC scheme was to effect ‘repayment’ by the transfer of shares by way of circular, self-cancelling arrangements so there was no repayment in money. The FTT further concluded that there was a connection between the ‘repayments’ and tax avoidance arrangements i.e. the QLC arrangements which were intended to avoid the loan charge without the taxpayer suffering the economic and commercial consequences which Parliament intended a repaying taxpayer should suffer.

The decision in Lowry can be found here.

The decision in Grand Smile can be found here.