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TAXtv airs negligible value share debate

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15th Jan 2014
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The challenges of proving shares are worthless to claim tax relief and how to decide when company directors are negligent in the eyes of the tax system were discussed by tax experts Giles Mooney and Tim Good in the latest episode of TAXtv.

The discussion was based on a tribunal case, Robert Brown v HMRC, in which Brown invested £250,000 in unquoted shares in a company set up to do research and development. The company didn't make any profit.

He then made a negligible value claim to establish a capital loss on the shares which under the share loss relief section of the Income Tax Act 2007, which would allow him to offset the loss against his income for the year of loss or the previous year.

HMRC argued that the shares had not become of negligible value.

For an asset to become of negligible value it should be “practically worthless” or the shares should have no value on the open market. This was the Revenue's argument, which noted that another shareholder bought out another shareholder and subscribed to shares for about £1 each, which mean Brown’s shares were of negligible value.

But the tribunal concluded that there would be no prospect of Brown selling his shares on the open market. Even if he did attempt it, a hypothetical purchaser with knowledge of the shares wouldn’t buy them.

Mooney said the case is a reminder that that the taxpayer also has to show the shares were once of value.

Under a debt-for-equity swap an individual may loan a company, for example, £100,000 and then try to access share loss relief by convert the loan into share capital. The person then claims that the shares are worthless and may claim for a loss.

In this situation, HMRC would argue that when you acquired the share were worthless when purchased.

In another case (HMRC v Charles Michael O’Rorke), O’Rorke was a director of a company which went into liquidation after a very short amount of time. Company owed sizeable amount of money to national insurance to HMRC, which pursed the directors for money owed.

HMRC charged O’Rorke with a large amount of money. O’Rorke said he should not owe the money because he was mentally ill at the time of being a director at the company and doctors’ notes confirmed this.

But HMRC said his illness was irrelevant because the tax owed was due to negligence.

The dispute came down to one question: is negligence a subjective matter? A first-tier tribunal decided that the debt was nothing to do with O’Rourke’s medical condition and therefore chargeable. But then a separate first-tier tribunal ruled that medical status should have been taken into consideration.

But perhaps final word on issue will be the recent upper-tier tribunal which ruled that negligence is a matter of fact and someone’s medical condition should not be taken into account.

The case will go back to first-tier tribunal to decide amount of tax due and any penalties.

Mooney reckons that the national insurance tax will probably be owed but penalties could be reduced dramatically due to the medical condition.

Good concluded that the case highlights directors’ responsibilities for debts if HMRC can prove that they have been negligent.

Replies (2)

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By hiu612
20th Jan 2014 11:50

I've been in argument with HMRC on this

over whether shares had become of negligible value or had always been of negligible value since subscription. A long letter and a comparison to the graffiti artist who accepted facebook shares as payment of a $5k job done for the (then) fledgling company and HMRC backed down. But I've also chanced my arm on milk quota's bought for c£140k and worth about £400 on cessation of trade. Eventually subsequently sold for about £500 less £250 commission. In that case the slightly peculiar decision in Barker, Harper and Wickes v CIR served to support the HMRC assertion that £400 was not negligible, even on a cessation of trade and against the price paid of c£140k.

 

It certainly seems to be the case that HMRC are increasingly challenging reliefs and exemption (PPR for example) which would, a few years ago, have gone through on the nod. Often with surprising and disappointing outcomes too.

Thanks (0)
avatar
By hiu612
20th Jan 2014 11:50

I've been in argument with HMRC on this

over whether shares had become of negligible value or had always been of negligible value since subscription. A long letter and a comparison to the graffiti artist who accepted facebook shares as payment of a $5k job done for the (then) fledgling company and HMRC backed down. But I've also chanced my arm on milk quota's bought for c£140k and worth about £400 on cessation of trade. Eventually subsequently sold for about £500 less £250 commission. In that case the slightly peculiar decision in Barker, Harper and Wickes v CIR served to support the HMRC assertion that £400 was not negligible, even on a cessation of trade and against the price paid of c£140k.

 

It certainly seems to be the case that HMRC are increasingly challenging reliefs and exemption (PPR for example) which would, a few years ago, have gone through on the nod. Often with surprising and disappointing outcomes too.

Thanks (0)