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Definition of "employee" for ER purposes

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One of the conditions to be satisfied by a person seeking to claim entrepreneur's relief on a sale of company shares is that they must be an officer or employee of the company.

What experience do colleagues have of how "employee" is defined for this purpose?  Does it include someone who is paid a regular salary through PAYE but is not required to, and does not in fact, perform any work of any kind for the company?  Yes - an unusual situation of course.  Where it might arise is that the "employee" is the estranged spouse of the controlling shareholder, and was at one time a normal working employee, and at the time of the estrangement was relieved of their duties but nevertheless continues to be paid the same salary.

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By Justin Bryant
27th May 2020 10:58

She is no more an employee than you or I would be employees if this company put us through the payroll (the tax tail (or label) never wags the reality dog). Perhaps suggest he makes her company secretary as that's an officer holder where no actual work is needed (if he made you or me the company secretary we would be proper company secretaries even if we did nowt).

Incidentally your question to answer ratio must be lower than mine. Perhaps a more interesting question is whether an IR35 person qualifies for ER.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
27th May 2020 11:15

I can think of few cases where ER would not apply in IR35 cases. In most IR35 cases, the individual is a director and majority shareholder of his company, which is invariably a trading company.

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Replying to Wilson Philips:
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By Justin Bryant
28th May 2020 08:30

I note the more interesting disguised employment (IR35 etc.) question is more or less answered here in the +ve (as one would expect): https://www.rossmartin.co.uk/sme-tax-news/1298-entrepreneurs-relief-and-...

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Replying to Justin Bryant:
Psycho
By Wilson Philips
28th May 2020 08:40

IR35 has nothing to do with ‘disguised’ employment in this context.

Unless you are contemplating the unusual situation where an IR35 director also holds shares in the end-client. I’m not convinced that Corbett answers that question. But I agree that it would be an interesting one.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
28th May 2020 08:41

Duplicate

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By fawltybasil2575
27th May 2020 23:59

@ johngroganjga (OP).

I must respectfully disagree Justin’s view that, purely on the basis of the facts in your question, an ER claim (more strictly a claim to Business Asset Disposal Relief if the transaction date is on or after 6 April 2020) must necessarily be invalid.

Further facts need to be established, to enable one to try to answer your question: to that end, may I ask:-

(1) Is the sale of the shares a “past event” or a “hypothetical/possible future event” ?

(2) When was the share sale/when will the share sale be completed ?

(3) When did the “estranged spouse” last perform any employment duties: and what were those duties?

(4) Was there/will there be a current contract of employment at the date of sale ?

(5) Has the "estranged spouse" previously been an officer (director and/or secretary) of the company ?

(6) [Possibly most importantly] As the “estranged spouse” has been relieved of their duties, WHY has the “regular salary” continued to be paid (and for what length of time) ?

As has been established at Tribunal, the fact that a formal contract of employment has ceased, prior to sale, would not disqualify the potential ER claim if one can provide evidence that employment duties continued after such cessation: whilst one could be tempted to assume that your case is the opposite of such case (ie that your case is one of a seeming “employment” which does not accurately reflect the prima facie absence of employment duties) one must delve further.

There may be, for example, an arrangement under which the “estranged spouse” continues to receive “salary” in consideration for past duties (whether in relation to a pre-existing oral or written contract, or as part of a new agreement related to financial arrangements re the separation/impending divorce).

Basil.

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Replying to fawltybasil2575:
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By Justin Bryant
03rd Jun 2020 18:45

Obviously I meant all else being equal. Like this sort of guidance: https://www.taxinsider.co.uk/tax-implications-of-employing-family-members

"•Your relative has to be hired to do real work at a proper commercial wages rate. HMRC are likely to query payments of £50 per hour to a 5-year-old who is ‘employed’ to take telephone messages!"

So there are also CT issues here. But I think a company secretary who does nothing is OK up to about £5k p.a. (as there are potential liabilities with such office) per the following from the link below.

"Until 1998, for capital gains retirement relief to be available, it was necessary to demonstrate full-time working activity in the business. With its successor, entrepreneurs’ relief, evidence will be needed to show that an employment or office exists, with no minimum working hours."

https://www.taxation.co.uk/articles/2015-06-01-333173-full-time-and-active

See also: https://www.taxation.co.uk/articles/readers-forum-spouse-wages

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Psycho
By Wilson Philips
27th May 2020 11:13

It has been held in the courts that a worker does not have to be on the payroll to be classed as a worker for ER purposes. The corollary, as Justin suggests, is that paying someone does not make them an employee.

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Replying to Wilson Philips:
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By Justin Bryant
27th May 2020 11:54

That's not a corollary. That's a contrast.

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By Tax Dragon
28th May 2020 06:05

To address the question, there is no 'special' definition of employee for the purpose in question. Justin is of course right that being paid does not make you an employee.

To consider your example, Basil's question about why the estranged spouse was being paid would need to be addressed. If it turned out effectively to be a form of maintenance, for example, then (TRFKA) ER would perhaps be the least of your concerns. (You might even need to consider your AML obligations in such a circumstance.)

On the other hand, an employee on garden leave, for example (or currently furloughed), is still an employee. If the events in question were fairly recent and the arrangement fairly new, there may be no issues (well, no tax issues) at all. And 'ER' would apply.

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Replying to Tax Dragon:
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By Tax Dragon
28th May 2020 06:10

Tax Dragon wrote:

If it turned out effectively to be a form of maintenance....

An obligation of the other estranged spouse. As distinct from say an annuity from the company itself - an obligation of the company.

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