Entrepreneurs’ relief and the need to be employed

The First-tier Tribunal decision in relation to Susan Corbett (TC03435) was published on 4 April 2014. The FTT considered the availability of entrepreneurs’ relief (ER) on a disposal of shares in a trading company and, in particular, whether Mrs Corbett was an employee of the company throughout the period of one year ending with the disposal. There was no dispute as to whether the other requirements set out in chapter 3 part 5 TCGA 1992 had been met by Mrs Corbett.

Background

Mr Corbett was a senior executive employed by Optivite International Limited (“Optivite”), and was involved in negotiations for the sale of the company to Kiotech International Limited (“Kiotech”), which took place in October 2009.

Mrs Corbett was employed by Optivite, providing secretarial duties to her husband, for which she received a salary of £14,000 a year. Kiotech had a strict policy of not employing spouses of senior executives, and in order to forestall any problems with negotiations for the sale Mrs Corbett was removed from the company’s payroll and received her P45 in February 2009. However, she continued to work for her husband, whose salary was increased by £1,200 a month to compensate them for the loss of her salary.

Mrs Corbett’s tax return for 2009/10 showed a disposal of 1,500 shares in Optivite on which she claimed ER. HMRC issued a closure notice in December 2012 disallowing the claim for ER, and this was upheld by a formal internal review issued in February 2013.

HMRC’s arguments

HMRC argued that when Mrs Corbett received her P45 in February 2009 her employment ceased. After that date she was not employed by the company, as without remuneration there can be no employment.  The fact that Mr Corbett received an amount that equated with his wife’s previous salary was not relevant – the increase could have been a salary increase to recognise the extra work he was doing in connection with negotiations for the sale of the company.

Mrs Corbett’s arguments

Mrs Corbett argued that she had remained as an employee of Optivite until October 2009. As the company operated a computerised payroll the only way of removing her was to produce forms P45 and P14, but this did not mean that her duties changed. She continued to do the same work as she had done previously.

HMRC’s manuals confirm that remuneration is not required for eligibility to ER in CG64110. Indeed, it could be argued that because Mr Corbett’s salary was paid into a joint bank account, Mrs Corbett continued to receive her salary.

The tribunal’s decision

Evidence was provided by Optivite’s financial controller, Mr Butlin, who confirmed the position described by Mrs Corbett and her advisers. The tribunal found that he was a credible independent witness, as it made no difference to the company whether she succeeded in her claim for ER.

They were satisfied that, on the balance of probabilities, the company continued to remunerate Mrs Corbett by directing her salary to Mr Corbett and paying it into their joint bank account.

The tribunal therefore allowed Mrs Corbett’s claim for ER in respect of the sale of shares in Optivite.

What this means

In order to claim ER on the sale of shares the shareholder has to be a director or employee of the company throughout the period of one year up to the date of sale. Where spouses or civil partners own shares in a trading company, and only one qualifies for ER, the usual advice is that, before the sale, the non-qualifying individual should transfer their shares to the individual that qualifies.

The decision in Mrs Corbett’s case is surprising, and turns on facts that were corroborated by a credible witness.  It is not a case that should be used as part of planning for ER.

For further information and advice on issues arising from this case please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.