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Signing a contract

Tribunal rejects exclusion of debt from proceeds


Two taxpayers assessed on the total raised by the sale of their shares, despite part of it being used to settle a bank debt, discovered the importance of legal contracts in tax matters.

6th May 2022
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In a case that underscores the importance of legal contracts and their tax implications, two taxpayers were assessed on £8m of consideration on the sale of their company’s shares, despite only actually receiving £6.9m between them (the remainder having been used to settle the company’s bank debt).

In 2013/14, McEnroe and Newman sold their joint shareholding in Kingly Care Partnership Ltd (KCPL). The sale and purchase agreement stated that the consideration for the 100% share ownership was £8m.

On the day of the sale, just over £1m of funds were transferred to Allied Irish Bank, to settle a bank debt KCPL had with them. The remaining balance of the £8m (about £6.9m) was, after the deduction of professional fees, transferred equally to the taxpayers.

In their tax returns, McEnroe and Newman reported consideration for the shares as 50% of about £6.9m (plus an earn out amount, which was not part of the appeal).

HMRC enquired into the tax returns and issued closure notices, amending the consideration for each taxpayer to 50% of £8m, plus the earn outs. The taxpayers appealed [TC 08444], with the first tier tribunal (FTT) determining the appeal without a hearing (that is, as a default paper case).

Point in dispute

The only point in dispute was whether the consideration for the shares should have been £8m, or the £8m less the bank debt.

The taxpayers argued that the agreement, properly construed, was that the buyer paid around £6.9m for the shares and circa £1.1m to repay the bank debt. 

HMRC’s position, by contrast, was that the actual contract was clear. The fact that the contract could have been structured differently did not change the actual contract the taxpayers entered into.

No ambiguity

The FTT saw no ambiguity in the contract itself. The sale and purchase agreement stated that the sellers agreed to sell the two shares in issue to the buyer. The consideration for the sale and purchase of the shares was stated in the contract to be £8m. The bank debt was not referred to in any clause that was relevant to the consideration for the purchase of the shares.

The FTT therefore did not agree with the taxpayers’ argument that the contract was for the sale of the shares and the discharge of the debt. Rather, the contract alluded to the fact that the debt would be discharged, but did not say anything about how this was to be done, and crucially did not refer to the £8m being anything other than consideration for the shares.

Section 52(4) TCGA 1992 (apportionment of consideration) was therefore not relevant in this case, as there was nothing other than the shares to apportion the consideration between.

The appeal was dismissed.

Not a shocking outcome

The taxpayers did apply to add grounds of appeal concerning rectification. However, their application was refused, and so rectification was not discussed in detail by the FTT.

Given how clear the final contract was as to what the consideration was for, the outcome of this appeal is not all that shocking. However, it does serve as a reminder of the importance of proper legal drafting of contractual documents.

Replies (2)

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By Justin Bryant
06th May 2022 17:28

"Given how clear the final contract was as to what the consideration was for, the outcome of this appeal is not all that shocking."

Are you serious? Every other experienced commentator says different and this is almost certain to be reversed on appeal as it's a badly flawed decision. See:

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By Paul Crowley
07th May 2022 15:52

This really is a bit daft by all parties concerned.
I blame the advisors to all parties and the person drawing up the contact.

Buyer agreeing the value as £8m for debt free company just needed to split the money on the day.
£1.1 becomes a loan to the company to pay off debt. Returnable tax free when available.
£6.9 is the true cost of the company shares

Surely at least one person involved could figure this one out?
All parties better off

What was the entry in the company and tax effect of seller paying off debt?

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