Entrepreneurs’ relief: Mem and arts must make it personal
The tax tribunal refused to make up for deficiencies in a company’s memorandum and articles of association. The rights attached to the taxpayer’s shares didn’t meet the ER conditions and relief was denied.
The appeal of Guy Holland-Bosworth (TC07811) against HMRC’s refusal of entrepreneurs’ relief was as doomed as Richard of York giving battle in vain. The taxpayer’s shares did not carry the necessary rights and the tribunal Judge effortlessly cut to pieces the arguments for a purposive approach based on the parties’ alleged intentions.
This was no long drawn-out courtroom drama: in a judgment welcome for its brevity and clarity Judge Julian Ghosh QC dropped his spoiler into the second paragraph thus;
“The issue is whether, when the Appellant disposed of 50 "B" Ordinary Shares (“the B Shares”) [he] was entitled to Entrepreneurs' Relief in respect of the capital . . . . The short answer is "no".”
Personal company requirements
The definition of a personal company for ER (renamed business asset disposal relief) purposes is clearly set out in TCGA 1992 s 169S(3).
“Personal company in relation to an individual, means a company:
- at least 5% of the ordinary share capital of which is held by the individual, and
- at least 5% of the voting rights in which are exercisable by the individual by virtue of that holding”.
It is established law that for voting rights to be counted as “exercisable” they must be able to be exercised in a general meeting.
Setting the scene
There was no disputing that Holland-Bosworth had held his shares for the required period of time (then one year; now two years).
The taxpayer had held his shares, originally a 50% holding of a single class of shares, since the company began. Following a takeover in 2011 his shareholding was reduced to 3.7% of the company’s ordinary share capital and those shares were redesignated as “B ordinary shares”.
The taxpayer and parent company recognised that a 3.7% holding of shares was not enough for the company to be his personal company and a bonus issue was arranged which increased his shareholding to precisely 5% of the ordinary share capital.
What nobody seems to have done then, or at any later time, was to check the voting rights attaching to the shares in the company’s memorandum and articles.
If the advisers had done so they would have come across article 4 which specifically excluded the holders of B ordinary shares from entitlement to receive notice of, attend or vote at any general meeting of the company. Furthermore article 5 provided that the rights of any class of shares might be altered or abrogated with the written consent of at least three quarters of the holders of that class of shares or by special resolution.
At no time was any attempt made to remedy the deficiency in the memorandum and articles, which course of action was open to them.
The “we thought we could” argument
The taxpayer’s representative argued that the shares should be regarded as meeting the voting rights criterion because, to paraphrase:
- that was what the taxpayer and all the other shareholders, including the parent company, intended;
- all parties had always acted as if the claimant held those rights, including by allowing him to participate and vote in general meetings;
- annual reports and returns to Companies House recorded him as having and exercising such rights; and
- it is not necessary that voting rights be exercisable in a general meeting and the ability to amend the rights attaching to the shares meant that they could be seen as within TCGA 1992 s 169S (3) because it was possible that they might be brought within that provision under article 5.
The contentions as to the intentions and wishes of the holding company were made as assertions for which no corroborative or supporting evidence was adduced and those other parties were not present or represented at the hearing.
Judge Ghosh gave the shortest of shrift to the arguments presented on behalf of the taxpayer, noting the complete absence of evidence to support the assertions made.
The appeal was dismissed.
My kingdom for a little horse-sense
All of this trouble could have been avoided when the first effort was made to ensure that the taxpayer’s shares met the personal company criteria for ER.
If the memorandum and articles of association had been examined, and advice taken as to their effects, it would have been a straightforward process to amend them. If, as was asserted, all parties had genuinely intended that the taxpayer should have the required voting rights, ie rights conferred by the shares themselves, not by custom and practice contrary to the plain words of the mem and arts .
When the script is well written there may be a drama but not a crisis.