Date of disposal decision upsets ER claim
The First-tier tribunal decision in John Kenneth Moore v HMRC [UKFTT 0115] provides a salutary reminder of potential issues which have to be considered in a company purchase of own shares situation where a claim for entrepreneurs’ relief (“ER”) is at stake. In this case the decision held over the date of disposal, dictated by company law provisions, had an adverse outcome on the appellant’s ER claim.
Facts of the case
Mr Moore, a founding shareholder and director of a trading company agreed to leave the company after a dispute with other directors during the year 2008. Using a mediator, unsigned terms were agreed in February 2009 whereby it was agreed that the company would purchase 2,700 of Mr Moore’s 3,000 shares and the remaining 300 would be converted to non-voting shares. Mr Moore would resign as a director and would receive an ex-gratia payment on termination of employment.
On 29 May 2009, at a general meeting, the company agreed to buy the shares and Mr Moore signed a compromise agreement agreeing to terminate his employment. The documents stated that the effective date of his resignation as a director was 28 February 2009.
Clearance was sought and obtained from HMRC that the purchase of own shares would be treated as a capital transaction. However, HMRC refused ER on the disposal on the grounds that Mr Moore had not been employed throughout the period of 12 months ending with the date of disposal of shares in May 2009.His employment had ceased in February 2009 as reflected in the compromise agreement. Mr Moore’s original argument had been that his employment ceased in May 2009 but at the tribunal, Mr Moore advanced a completely different case in that the contract for the sale of shares had been concluded in February 2009 at the same time he no longer held office and therefore the 12 month rules For ER purposes had been met.
The FTT found that the employment had terminated on 28 February and agreed that the parties had also reached agreement over the purchase of shares at the same date. However, under TCGA 1992, s 28, the contract to purchase the shares must be unconditional. If there is a conditional contract the date of disposal and acquisition would be the date on which those conditions are satisfied.
Under company law provisions, a company can only agree to purchase its own shares by passing a special resolution therefore the FTT’s view was that the company was unable to enter into a valid contract to purchase the shares until the resolution had been passed. If a contract did exist at that time it was conditional on approval by special resolution and that was only satisfied on 29 May 2009.
In conclusion therefore, the FTT held that Mr Moore had left employment in February 2009 but did not dispose of the shares until May 2009 following the approval of the special resolution and therefore did not meet the 12 month rule for ER purposes.
Why this matters
The general advice provided in such situations is make sure that the resignation of a directorship takes place after the purchase of own shares to avoid a loss of ER. This case potentially extends that timing of the resignation to comply with company law requirements. In essence making sure that the resignation takes place after the special resolution to purchase the shares is approved would appear essential. The case demonstrates that ER is firmly on HMRC’s radar and practitioners should be alert to these types of situations.
For further information in relation to this case and purchase of own shares please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann, Paul Howard or Paula Tallon.