The Importance of Employment Status – Get it Right

A recent case emphasises the importance of being clear about employment status in relation to share ownership. Here, the failure for the appellant to demonstrate that he was an employee resulted in a significant loss of tax relief on the sale of shares. This is clearly relevant in respect of entrepreneurs’ relief, where it is also necessary for vendors to demonstrate that they had an employment in the company, or group, twelve months prior to a sale of the shares, as well as meeting the other criteria for the relief.

Needless to say, lack of clarity about employment status is also of fundamental importance when establishing employee share schemes. Where there is any doubt about an individual’s employment status, care should be taken before including that person as a participant in an employee share plan.

The case involved the somewhat forgotten capital gains tax relief, Business Asset Taper Relief (“BATR”), where subject to meeting certain conditions the chargeable gain was taxed at an effective rate of 10%.

BATR was the precursor for entrepreneurs’ relief. The appellant in the case, Shannon v Revenue and Customs Commissioners, had sold his company Supercuts UK Limited to Regis in 1999 for cash and shares. Mr Shannon subsequently sold some shares in Regis in the 2002/2003 and 2003/2004 tax years’. HMRC argued that Mr Shannon was not an employee of the Regis group when he sold the shares and as such did not qualify for BATR.

Mr Shannon argued that a letter was exchanged with Regis which set out his employment contract and that the change of control payment that he was to receive of £100,000 each year, for five years post-completion, was in fact employment income from Regis. The employment contract could not be produced and the £100,000 annual payment to Mr Shannon was not subject to payroll withholding by Regis.

HMRC had contended that an employment relationship did not exist as there was no mutual obligation for Mr Shannon to carry out any employment duties in return for the annual payment under the Share Purchase Agreement. As there was no credible evidence that Mr Shannon had ever undertaken any duties for the Regis, Mr Shannon’s appeal was dismissed.

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