On 25 June 2018 the Upper Tribunal (“UT”) handed down its judgment in Robert Ames’ appeal against the First Tier Tribunal’s judgment in Robert Ames v Commissioner for HM Revenue & Customs  UKUT 0190 (TCC), a case concerning the conditions needed to satisfy the eligibility of relief from capital gains tax (“CGT)” when disposing of shares that qualified for relief under the Enterprise Investment Scheme (“EIS”).
Robert Ames invested £50,000 into a company by subscribing for shares in January 2005, those shares qualifying for EIS relief. When completing his self-assessment tax return for 2004/05, his taxable income was only £42 and as it was below his personal allowance, he had no tax liability which could be reduced so did not make a claim for EIS income tax relief.
He subsequently sold his shares in June 2011 for £333,200 and declared via a white box note on his 2011/12 self-assessment tax return that the gain was exempt from CGT as the shares qualified for EIS relief and he had owned them for at least three years.
HMRC subsequently opened an enquiry into his 2011/12 tax return, determining that the whole gain was subject to CGT on the basis that he was only entitled to CGT relief if he had claimed EIS income tax relief as well. HMRC issued a closure notice on 28 January 2014 recalculating the tax liability to be £72,176.80 and following a statutory review, Mr Ames appealed to the First-tier Tribunal (“FTT”).
First-tier Tribunal decision
The FTT heard the appeal in April 2015 where Mr Ames represented himself. He argued that the legislation contained an anomaly whereby a taxpayer with income of £1 in excess of the personal allowance could claim the CGT exemption but those with income below the personal allowance would not be eligible.
In addition, he also tried to make a late claim for EIS income tax relief. The usual deadline for making a claim for EIS income tax relief is five years after the 31 January following the tax year in which the investment was made, meaning the deadline in this case was 31 January 2011. However, HMRC would only accept a late claim if there was a reasonable excuse and they felt in the circumstances that there were no grounds for a reasonable excuse.
The FTT dismissed Mr Ames’ appeal and held that the eligibility for CGT exemption required a claim for EIS income tax relief. Mr Ames subsequently wrote to HMRC requesting them to reconsider their decision on the late claim for EIS income tax relief but they wrote back on 5 October 2015 and denied his request.
Upper Tribunal decision
Mr Ames appealed to the Upper Tribunal on three grounds, summarised as follows:
- Focusing on the meaning of the word “attributable” as read in TCGA 1992, s150A(2) in that CGT relief should be available to EIS shares where income tax relief is available, irrespective of whether the income tax relief is claimed or not;
- That the FTT should have given TCGA 1992 a “rectifying construction” so that EIS CGT relief would be available even if the income tax relief was not claimed;
- That Mr Ames did have a reasonable excuse for his late claim for income tax relief
In addition, Mr Ames also applied for judicial review of the refusal by HMRC to allow his late claim for EIS income tax relief.
Despite substantive arguments put forward, the Upper Tribunal dismissed Mr Ames’s appeal on all three grounds. However, Mr Ames was thrown a lifeline in the Judicial Review when HMRC’s decision on 5 October 2015 to deny Mr Ames a late claim for EIS income tax relief was overturned. This was on the basis that HMRC did not adhere to its own guidance so they have been asked to review their decision in light of the facts that were presented.
The Upper Tribunal’s decision will be disappointing to entrepreneurs and those advising them, especially in circumstances where their taxable income may be low or negligible due to them investing vast sums of money in start-ups. In such cases, the taxpayer does have the right to disclaim their personal allowance in order to crystallise an income tax liability which can be reduced by EIS income tax relief.
In Mr Ames case, there may yet be hope following some success with the judicial review and should HMRC overturn their original decision to deny a late claim for income tax relief, it should in turn allow the gain made on the disposal of the shares to be exempt from CGT.
In terms of the application of the legislation as it stands, it remains to be seen whether a further appeal will be launched.
For further information and help with reviewing share capital please contact the TaxDesk on 0845 4900 509 and ask for Sean Eastwood.