Tax expert Peter Rayney replies to concerns that HMRC may deny entrepreneurs’ relief to shareholders who sell their shares back to the company.
My article, New challenge to entrepreneurs’ relief, was born out of a lecture given by a leading tax barrister based on his experience of entrepreneurs’ relief (ER) claims connected with the purchase of own share (POS) transactions being challenged by HMRC.
The arguments over the validity of these claims haven’t yet reached a tax tribunal, and any revised HMRC guidance is unlikely to be published until after such a tribunal case has been heard.
HMRC’s potential argument is that multiple completion dates used under some POS transactions don’t allow ER to be claimed on the value paid in the second and subsequent tranches.
This is contrary to every learned tax article ever written on this point, as Peter Rayney explains below.
When a POS clearance is obtained under CTA 2010, s 1044, this simply confirms that the amount payable to the shareholder under the POS transaction is not treated as a distribution (and is, therefore, subject to capital gains tax). The clearance doesn’t provide any confirmation that ER is available. So the fact that a CTA 2010 s1044 clearance has been obtained is of no real comfort to the taxpayer or his advisers.
HMRC’s potential argument goes against the currently accepted technical analysis on multiple completion POS transactions. I see that there is a legal point on the concept of whether there is an ‘acquisition’ in the context of a POS. Indeed, I would rely on this very point when it comes to claiming a capital loss on a POS (since there is no acquisition the ‘connected party’ loss rules should not apply).
What we have here is HMRC taking a very literal approach to the operation of TCGA 1992, s 28 in a way that was probably never even contemplated by the draftsman or indeed by Parliament. I strongly suspect that the reason why this point is being taken has something to do with the denial of 10% CGT entrepreneurs’ relief to some innocent taxpayer.
We should be able to rely on a ruling on this issue given back in 1989. In a statement, the Inland Revenue (as it was then) indicated its agreement to a POS being made in instalments, as reported in the ICAEW technical release 745 issued in April 1989. Indeed, para 10 (b) of the release states:
‘‘They [the Inland Revenue] take the view that as the beneficial ownership of the shares is regarded as passed at the date of the contract, a disposal for capital gains tax purposes will have taken place by the vendor at that time notwithstanding payments at later dates.’’
As far as I am aware HMRC has not retracted its agreement of this statement, so there must be a reasonable ‘legitimate expectation’ argument to run in relation to multiple completion POS transactions that have already taken place.
In my view, multiple completion dates used as part of a POS transaction do not involve any form of tax avoidance. The arrangements simply enable the company to ‘defer’ part of the purchase consideration in a ‘Companies Act’ compliant manner. In fact, under conventional analysis, all the CGT is paid up-front on the basis of the contract date per TCGA 1992, s 28, – so where is the mischief in that!
If HMRC’s new argument was ever taken to a tax tribunal, I do hope that the tribunal would take a reasonable balanced – and purposive – view of what is going on here. In my view it is an apparent ‘u-turn’ in HMRC’s tax treatment of entirely legitimate POS transactions just to deny ER.
If HMRC succeed in rewriting the CGT analysis for multiple completions, I suspect that more of us will simply be advising companies to structure their ‘buy-out’ transactions in a way that will deliver the anticipated ER CGT 10% for the ‘exiting’ shareholders. In some cases, it may necessary to use a new company (‘Newco’) as the acquisition vehicle to buy-out the shares of the departing shareholder with the existing shareholders ‘swapping’ their shares under the share exchange rules in TCGA 1992, s 135. But what an unnecessary palaver!
Peter Rayney provides independent tax advice to owner-managed businesses, tax advisers, accountants and lawyers. He also chairs the ICAEW Tax Faculty technical committee and is a CIOT council member