Entrepreneurs’ relief (ER) is among the most popular and well-known of tax reliefs. ER offers a capital gains tax (CGT) rate of 10% on net chargeable gains of up to £10 million. A claim for ER is available on a material disposal of business assets, such as an individual’s company shares, where certain conditions are satisfied.
A disposal of shares will typically involve a sale (or possibly a gift). However, for ER purposes the disposal of an interest in shares can also include a company purchase of its own shares from the individual shareholder. Such payments are normally treated as income distributions. However, if certain requirements are met (in CTA 2010, ss 1034-1043), the shareholder is normally treated as receiving a capital payment instead.
It’s in the timing
Share disposals require certain alternative conditions to be met for ER purposes, depending on the circumstances. The most common of those conditions requires that the following criteria are met throughout the period of one year ending with the date of disposal (see TCGA 1992, s 169I(6)): firstly, the company is the individual’s personal company and is either a trading company or the holding company of a trading group; and secondly, the individual is an officer or employee of the company (or, if the company is a trading group member, of one or more companies which are members of the trading group).
Thus ER can be inadvertently lost if (for example) the individual resigns as an officer and employee before the date of disposal of the shares.
Not so fast!
In Moore v Revenue v Customs  UKFTT 115 (TC), the taxpayer was a director shareholder of a trading company, and was also employed with the company under a contract of employment. Following a dispute between the taxpayer and the other director shareholders, it was agreed that the taxpayer would leave the business.
There were unsigned and undated Heads of Terms prepared in February 2009, in which it was agreed that the company would purchase 2,700 of the taxpayer’s 3,000 shares. It was also agreed that the taxpayer’s employment would be terminated, and that he would resign as a director.
Subsequently, at a general meeting of the company on 29 May 2009, it was resolved that the company would purchase the 2,700 shares from the taxpayer. On the same day, the taxpayer signed a compromise agreement for the termination of his employment, and also Companies House papers concerning his resignation as a director. However, that documentation stated the effective date of the taxpayer’s resignation as 28 February 2009.
HMRC refused an ER claim on the share disposal, because the taxpayer was not an officer or employee of the company throughout the period of one year ending with the disposal of his shares on 29 May 2009. The taxpayer appealed.
A company purchase of own shares must comply with company law requirements (in Companies Act 2006) to be valid. The First-tier Tribunal noted that a contract for the purchase must be approved in advance by resolution (CA 2006, ss 693-694). That resolution was not passed until 29 May 2009. The taxpayer ceased to be a director or employee on 28 February 2009. Therefore the ‘officer or employee’ condition for ER purposes was not satisfied for the one year period up to the date of disposal on 29 May 2009. The taxpayer’s appeal was dismissed.
The taxpayer in Moore continued to provide services to the company after his employment had ended. Even though he ceased to be a director and employee of the company in February 2009, it might have been possible to argue that he effectively continued to be an employee, based on ER case law (see Corbett v Revenue & Customs  UKFTT 298 (TC) and Hirst v Revenue & Customs  UKFTT 924 (TC)). Unfortunately (unlike in those other ER cases) in Moore the taxpayer’s services were provided through a personal service company, and not directly.
HMRC sometimes apparently argue that the date of disposal on a purchase of own shares (under a ‘multiple completion’ contract) is when each capital payment is received (within TCGA 1992, s 22(1)), and not the date of disposal under the contract (within TCGA 1992, s 28). It would therefore seem prudent to ensure that the conditions for entrepreneurs’ relief are satisfied when the proceeds are received, as well as (if different) the time of disposal under a contract in s 28.
The above article was first published by Business Tax Insider (July 2016) (www.taxinsider.co.uk).