Save content
Have you found this content useful? Use the button above to save it to your profile.
garbage
istock_Ivan Kmit

Rebuffing HMRC’s challenge to entrepreneurs' relief

by
18th Oct 2016
Save content
Have you found this content useful? Use the button above to save it to your profile.

Tax expert Peter Rayney replies to concerns that HMRC may deny entrepreneurs’ relief to shareholders who sell their shares back to the company.

My article, New challenge to entrepreneurs’ relief, was born out of a lecture given by a leading tax barrister based on his experience of entrepreneurs’ relief (ER) claims connected with the purchase of own share (POS) transactions being challenged by HMRC.

The arguments over the validity of these claims haven’t yet reached a tax tribunal, and any revised HMRC guidance is unlikely to be published until after such a tribunal case has been heard.  

HMRC’s potential argument is that multiple completion dates used under some POS transactions don’t allow ER to be claimed on the value paid in the second and subsequent tranches. This is contrary to every learned tax article ever written on this point, as Peter Rayney explains below.    

Clearance comfort 

When a POS clearance is obtained under CTA 2010, s 1044, this simply confirms that the amount payable to the shareholder under the POS transaction is not treated as a distribution (and is, therefore, subject to capital gains tax). The clearance doesn’t provide any confirmation that ER is available. So the fact that a CTA 2010 s1044 clearance has been obtained is of no real comfort to the taxpayer or his advisers.

Legal points

HMRC's potential argument goes against the currently accepted technical analysis on multiple completion POS transactions. I see that there is a legal point on the concept of whether there is an 'acquisition' in the context of a POS. Indeed, I would rely on this very point when it comes to claiming a capital loss on a POS (since there is no acquisition the ‘connected party’ loss rules should not apply).

Literal approach

What we have here is HMRC taking a very literal approach to the operation of TCGA 1992, s 28 in a way that was probably never even contemplated by the draftsman or indeed by Parliament. I strongly suspect that the reason why this point is being taken has something to do with the denial of 10% CGT entrepreneurs' relief to some innocent taxpayer.

Established practice

We should be able to rely on a ruling on this issue given back in 1989. In a statement, the Inland Revenue (as it was then) indicated its agreement to a POS being made in instalments, as reported in the ICAEW technical release 745 issued in April 1989. Indeed, para 10 (b) of the release states:

'‘They [the Inland Revenue] take the view that as the beneficial ownership of the shares is regarded as passed at the date of the contract, a disposal for capital gains tax purposes will have taken place by the vendor at that time notwithstanding payments at later dates.’'

As far as I am aware HMRC has not retracted its agreement of this statement, so there must be a reasonable 'legitimate expectation' argument to run in relation to multiple completion POS transactions that have already taken place.

No avoidance

In my view, multiple completion dates used as part of a POS transaction do not involve any form of tax avoidance. The arrangements simply enable the company to 'defer' part of the purchase consideration in a 'Companies Act' compliant manner. In fact, under conventional analysis, all the CGT is paid up-front on the basis of the contract date per TCGA 1992, s 28, - so where is the mischief in that!

Looking forward

If HMRC’s new argument was ever taken to a tax tribunal, I do hope that the tribunal would take a reasonable balanced - and purposive - view of what is going on here. In my view it is an apparent ‘u-turn’ in HMRC's tax treatment of entirely legitimate POS transactions just to deny ER.

If HMRC succeed in rewriting the CGT analysis for multiple completions, I suspect that more of us will simply be advising companies to structure their ‘buy-out’ transactions in a way that will deliver the anticipated ER CGT 10% for the ‘exiting’ shareholders. In some cases, it may necessary to use a new company (‘Newco’) as the acquisition vehicle to buy-out the shares of the departing shareholder with the existing shareholders ‘swapping’ their shares under the share exchange rules in TCGA 1992, s 135.  But what an unnecessary palaver!

 

Peter Rayney provides independent tax advice to owner-managed businesses, tax advisers, accountants and lawyers. He also chairs the ICAEW Tax Faculty technical committee and is a CIOT council member. 

Replies (7)

Please login or register to join the discussion.

By jon_griffey
18th Oct 2016 15:16

In the current climate of hostility towards tax avoidance, it is considered unacceptable for taxpayers and their advisers to exploit the wording of legislation to obtain a relief in a way Parliament never intended.

It must therefore be unacceptable for HMRC to exploit the wording of legislation to deny a relief in a way Parliament never intended.

This has to cut both ways.

Thanks (4)
By Ruddles
18th Oct 2016 15:26

The problem with Peter's 'solution' at the end is that one is still relying on HMRC's agreement that share-for-share treatment applies. If they get the notion that such transactions are being carried out wholly or mainly to get round the ER issue, how likely would they be to give such clearances?

Thanks (0)
Peter Rayney
By Peter Rayney
19th Oct 2016 08:21

Absolutely agree with jon_griffey!

HMRC normally has no problem with Newco buy-out transactions provided the departing shareholder is making a 'clean' exit. Indeed, I have obtained numerous clearances for such 'buy-out' transactions, which are the default route where the departing shareholder requires greater security for the 'deferred consideration.

Thanks (0)
Replying to Peter Rayney:
By Ruddles
19th Oct 2016 10:10

But, Peter, until now HMRC have normally had no problem with multi-completion buybacks either. Yes, I appreciate that buyback clearance is a separate matter from rates of CGT, but if there is a sudden increase in newco transactions following a restriction in availability of ER on MCBs, at the very least I suspect that we'll need to work hard to ensure that the bona fide commercial purpose is evident.

Thanks (0)
avatar
By Exector
19th Oct 2016 12:34

Apart from MCB POS issue with availability of ER post resignation, what about the potential for the outstanding indebtedness relating the future tranches, if providing a 30% or more interest in rights as a company creditor, anyway meaning that the POS cannot meet a capital treatment condition as vendor still then thereby connected to the company?

Thanks (0)
Replying to Exector:
By Ruddles
19th Oct 2016 14:40

You misunderstand how an MCB works

Thanks (0)
avatar
By Exector
20th Oct 2016 15:24

OK . Thanks for that clarification.

Thanks (0)