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image of hand pointing at spreadsheet | accountingweb | Shareholder owned 4.99998% (not 5%) of co. due to Excel rounding
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Excel rounding blunder almost lost taxpayer relief

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A taxpayer almost found out the hard way the importance of spreadsheet rounding when meeting the entrepreneurs’ relief conditions.

17th Apr 2024
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A shareholder was denied entrepreneurs’ relief (ER) on the sale of his holdings because, due to an Excel spreadsheet cell being set to round too generously, it transpired he had a 4.99998% holding instead of the required 5%.

Jonathan Cooke disposed of his total shareholding in ISG Holdings Ltd in February 2019, realising a gain of circa £600,000 and claiming ER, the predecessor to business asset disposal relief.

While Cooke seemingly met the majority of the necessary conditions for the relief, it became apparent during an HMRC inquiry that he did not in fact own the minimum required 5% shareholding for the 12 months to disposal, instead holding 4.99998% of the shares.

Strictly speaking, ER was not therefore available.

Cooke took his case to the first tier tribunal (FTT), arguing that if he were to bring proceedings before the high court (HC) it would order the rectification of appropriate documents such that he then held the required 5% of ISG.

He further argued that the FTT should proceed as if this rectification had already been ordered, based in particular on Lobler vs HMRC, an upper tribunal case, therefore allowing his claim for ER.

Too many Cookes?

Cooke had known the founders of ISG, Ben Ridgeway and Jamie Cooke (no relation), for several years, helping them grow the business.

In 2017 the two founders agreed to sell Cooke part of their shareholding. Cooke had invested in several companies prior to ISG and so stipulated, not only that he wanted to acquire at least 5% of the shares, but also that the purchase agreement must include an anti-dilution clause so he maintained the 5% holding.

Various matters were discussed and negotiated, but the fact that a 5% shareholding would be transferred was purportedly agreed at an early stage. Cooke continued to monitor the shares of the company to ensure his ownership remained unchanged and seemingly fully believed he had a 5% holding throughout.

For want of a share

Given that Cooke acquired 245,802 shares and given this was a 4.99998% holding, he seemingly needed a single further share to take him to an actual 5% holding. The error was traced to a spreadsheet cell being set to round too generously.

All three individuals gave evidence to the FTT. Cooke reiterated that he had always believed that he had the intended 5% holding and that various correspondence supported this and made it clear he was intentionally acquiring 5%, rather than a set number of shares. Ridgeway and Jamie Cooke confirmed that, while they were reluctant to sell more than a combined 5% holding, neither would have had an issue parting with an extra share in order to achieve Cooke’s intended outcome.

Good intentions

HMRC argued that the intention had been to sell “about 5%” of the shares. The FTT dismissed this, agreeing with Cooke that the intention had always been to acquire at least 5%.

Following on from the above decision in Lobler, the FTT agreed that while it was unable to order rectification of the prior transactions, if it was able to determine that another court would order such rectification it could rule that the tax treatment should be amended in line with that rectification.

The task as the FTT saw it was therefore to consider what the HC would do if asked for rectification. In order to ascertain this with the degree of certainty required, the FTT considered various matters based on the approach in various cases, in particular Giles.

More to the point

Firstly the FTT agreed that all parties had a clear intention to achieve a set outcome (the transfer of a 5% holding) and that this was not flexible, nor had it changed at any stage. The intention had continued up to and including the time the exchange was executed, with the revelation that a 5% holding had not in fact been transferred coming as a shock to those involved.

All parties agreed there had been a mistake and that mistake had prevented the intended outcome from being reached.

Next, the FTT considered whether the HC would decide there was a matter capable of being contested and, if so, whether the only effect would be the securing of a fiscal benefit. The FTT was satisfied that there was more than a fiscal benefit, as each party to the transaction would have received a slightly different amount on the eventual sale of their holdings. Further, given all of ISG was being sold, the buyer would not be affected by who actually owned what proportion of the shares.

Finally, rectification was being sought without undue delay, with all parties aware there was an issue that needed to be remedied.

The FTT therefore concluded that, if asked, the HC would grant rectification of the documents and so the shareholding transferred. The conditions for ER were therefore to be treated as met in this instance.

Replies (19)

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By Justin Bryant
17th Apr 2024 16:20

The taxpayer could almost certainly have sued his adviser who cocked things up here (BTW that used to be a banned word here), so perhaps it was the latter (and his insurers) who was the most relieved at this decision.

Thanks (1)
Replying to Justin Bryant:
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By rememberscarborough
17th Apr 2024 16:29

Think "The Taxpayer" i.e. us should sue HMRC for wasting precious resources on a case where it was abundantly clear what had gone on and what the intentions had been.

Think how many HMRC advisors could have been answering phone calls for other taxpayers for the cost of legal fees in this idiotic case. More and more HMRC are proving themselves not fit for purpose!!

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Replying to rememberscarborough:
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By Justin Bryant
17th Apr 2024 16:54

But there's nothing HMRC love more than [***] someone over an obvious and totally innocent [***]-up (the illegal word blocker is now working it seems!).

Thanks (6)
Replying to rememberscarborough:
By ianthetaxman
18th Apr 2024 12:16

Very true, and a shocking display of what HMRC has become.

BTW - excellent name: no doubt it was a difficult choice between this and Weston-Super- Maaaaaaareeeeeee (if it is, in fact, what I think it refers to!).

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Replying to Justin Bryant:
By Ruddles
17th Apr 2024 23:05

Duplicate

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By listerramjet
18th Apr 2024 09:44

Spreadsheet error or HMRC reaching new heights of pedantry?

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By KeithOwen
18th Apr 2024 09:50

I've had this problem too. It stems from the way computers interpret fractions, and how some fractions in binary (base-2) don't have exact equivalents in base-10, which manifests as a difference of a tiny fraction - and spreadsheets, more often than not, display a rounded figure when the underlying value still contains the tiny misalignment. Here's a great video by Tom Scott that explains it: https://www.youtube.com/watch?v=PZRI1IfStY0&t=19s

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Replying to KeithOwen:
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By Rob Swan
18th Apr 2024 10:09

Another interesting point.
Without explicit knowledge of the spreadsheet in question it isn't possible to say exactly, and this DOES look like a floating point problem, given the number of decimal places - floating point is NEVER 100% accurate with decimal fractions.
In some cases - mostly 'currency' types I think, Excel automatically multiplies by 100, converts the decimal into an integer (whole number) internally but always displays it with a decimal point in the right place. This ALWAYS avoids the floating point problem of (very slight) inaccuarcy.

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Replying to KeithOwen:
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By Rozzi Rainbow
19th Apr 2024 13:49

I found that video really interesting, thank you. And it explains why my Excel cashbooks don't always show exactly zero when I write off the cash balance, if I don't set it to 2d.p.

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Replying to KeithOwen:
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By TomMGR
20th Apr 2024 07:59

This is not a floating point error. It is simply a case that the number formatting (i.e. rounding) was set to show insufficient decimal places so the user of the spreadsheet was unaware that the actual percentage was slightly under the desired 5%.

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Replying to TomMGR:
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By adam.arca
20th Apr 2024 09:21

Indeed. It appears the spreadsheet creator was unaware of the ROUNDDOWN function, which would have been the appropriate one to use in these circumstances.

But then we aren’t told whose spreadsheet it was and whether it had been re-purposed from something else.

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By flightdeck
18th Apr 2024 09:52

Wonderful news, I am so pleased HMRC are focusing on this kind of deliberate fraud.

Here we have it folks : the computer said "no" and no human in HMRC felt accountable enough to engage brain and deliver common sense. Why employ people at all? Sack the lot, save the money.

Thanks (8)
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By NewACA
18th Apr 2024 10:09

This is why the GAAR should be double-sided, not just for HMRC to use only, bur for taxpayers to use against HMRC.

Not only should HMRC use GAAR to protect revenue from contrived legal situations, but the taxpayer also needs protection from contrived HMRC attempts to extract tax, according to the law, when the clear intention was obviously not to avoid tax and a simple mistake was made.

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By Rob Swan
18th Apr 2024 10:11

More proof that HMRC has been completely stripped of any and all practical common sense.
All hope abandooned ;)

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By LAMBERTCLERICAL
18th Apr 2024 15:13

The phrase "substance over form" comes to mind . . . .

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By moneymanager
18th Apr 2024 20:24

"Tax, needn't be taxing" said Hector.

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Replying to moneymanager:
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By Rob Swan
19th Apr 2024 04:25

"Silly old Hector!"

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By [email protected]
19th Apr 2024 12:47

..... and just how many times do we end up having to make adjustments to balance sheets because HMRC round to the nearest Pound when entering data for web filing?

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By Richardsgi
25th Apr 2024 10:22

Multiplying it back, it would seem there were a total of 4,916,059 or 4,916,060 shares issued. Either one leaves him one share short of 5%, which I would have thought he would have picked up on if he was monitoring it.
Either way, it's an absolute waste of time on the part of HMRC

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