Former Ryanair pilot’s judicial review petition challenging HMRC statutory loan charge refused

Niall Finucane, a citizen of Ireland and Switzerland who worked out of Glasgow Prestwick Airport for Ryanair between 2001 and 2014, sought declarator that a loan charge imposed on him by Her Majesty’s Revenue and Customs in 2017 was unlawful and in violation of the fundamental EU principle of free movement of capital.

The petition was heard by Lord Tyre. The petitioner was represented by O’Neill QC and the respondent by Simpson QC.

“Loan scheme” 

The petitioner’s contractual arrangements were operated by an English-registered company, Brookfield Aviation International Ltd, on Ryanair’s behalf. In 2008, he was informed that he would henceforth be treated as providing his services to Ryanair as a self-employed individual rather than an employee, a matter which he claimed to be given no choice in. 

Following this decision, which he believed was made to remove him from statutory protections for employees, the petitioner sought tax advice from AM Ltd (AML), a company based in the Isle of Man, which advised him to enter into a “loan scheme” under which AML would initially receive payment from Brookfield and then later pay the petitioner by way of small amounts of salary and advanced “loans”, which the recipient rarely provided for the repayment of. 

HMRC have for many years regarded schemes of this kind as a form of tax avoidance. In order to recover tax on remaining outstanding and untaxed loans under these schemes, the Finance (No 2) Act 2017 introduced a charge, known as the loan charge, to be levied on the amounts of any loans outstanding as at 5 April 2019. Such a charge was imposed on the petitioner in 2017. 

It was agreed that various fundamental rights under EU law were relevant to the petitioner’s case, as proceedings were commenced prior to the completion date of the UK’s departure from the EU. He averred that he was advised by AML that he had no alternative to using a loan scheme if he were to continue working for Ryanair as a self-employed contractor and continue paying tax in the UK, and that he was not motivated to enter into the scheme for its tax mitigation benefits. 

Regarding the lawfulness of the loan charge, it was submitted that, as a non-UK EU citizen working in the UK for an Irish company, it was unnecessary for him to identity a specific provision of EU law in order to found on the right to free movement of capital. The loan payments made to him were loans in fact and in law, and therefore were considered capital for the purposes of the relevant rights under the Treaty of the Functioning of the European Union. 

In response, it was submitted for HMRC that the application should be refused as incompetent as the petitioner had an alternative remedy of appeal to the First-tier Tribunal Tax Chamber. Further, it was clear that the loan schemes were conduits through which money paid by Ryanair reached the petitioner in exchange for his services as a pilot. The money was therefore entirely earned through working. Article 63 of the TFEU did not define a capital movement, but EU law made it clear that movement of capital related to investment rather than remuneration. 

No movement of capital 

In his opinion, Lord Tyre said of the competency of the petition: “Although the nature of the petitioner’s challenge could be described as constitutional, in so far as it seeks a declaration that certain provisions of UK tax legislation are unlawful because they breach principles of EU law, the critical fact that gives him standing is that he is resisting a charge to income tax that he expects to be made upon him. That, in my view, is a matter whose resolution has been allocated by Parliament to the specialist tax tribunals.” 

Addressing whether the loans were movement of capital, he said: “In the absence of a definition in the Treaties of the expression ‘movement of capital’, the decision of the Court of Justice in Luisi and Carbone v Ministero del Tesoro (1984) provides a useful starting point.” 

He explained further: “It could be said that the overall effect of the arrangements entered into was that the petitioner’s services as a pilot were provided by him to Ryanair in exchange for the payments that the petitioner received from AML, consisting partly of a small salary and partly of non-commercial loans. On the basis of the Court’s analysis in Luisi and Carbone, that is not to be classified as a movement of capital because it amounted to payment for services.” 

Lord Tyre added: “I find nothing in the factual circumstances of this case to indicate that the petitioner had the subjective intention of obtaining an abusive advantage from his EU right of free movement of capital: there is nothing in either party’s case to suggest that reliance upon that right was an integral part of the loan schemes into which the petitioner entered.” 

Finally, Lord Tyre addressed a submission by the petitioner that the charge amounted to a financial penalty, saying: “It would be fair to say that some of the original features of the 2017 legislation, could arguably have been regarded as having a flavour of punishment about them. But these proceedings are concerned with the law as it now stands. That law does not go beyond ensuring the collection of tax on payments received since 2010 by taxpayers as remuneration for work done, in respect of which no tax has otherwise been paid.” 

He concluded: “The issue of whether a loan upon which the charge has been paid could also be subject to a demand for repayment, whether by the original lender or by an assignee, seems to me to be one which lies between any taxpayer in that position and the scheme promoter responsible for devising the terms of the loan. In any event, the petitioner’s characterisation of the charge as a penalty falls to be rejected.” 

For these reasons, the petition was dismissed.