Entrepreneurs’ relief – the importance of careful record keeping
A recent case (Moore v Revenue & Customs Commissioners ( UKFTT 0115 (TC)) resulted in a shareholder being unable to claim entrepreneurs’ relief on the sale of his shares.
The case demonstrates how important it can be to get the paperwork right, in particular, the dating of various agreements and resolutions, and ensuring that all the dates and details are reflected adequately in the filing of statutory returns, both at Companies House and with HMRC. Failing to do so can sometimes have significant consequences.
Here, it was of importance because, in order to obtain entrepreneurs’ relief on the sale of shares, an individual must (among other things) have been an employee or director of his company for the 12 months leading up to the date on which the shares were sold. In this case, there was a discrepancy between the date that the seller thought the shares had been disposed of, and the date on which the shares were actually disposed of according to all the records kept. As a result of this discrepancy, the seller was unable to claim entrepreneurs’ relief on the sale.
M was a founding shareholder in a company, with around one-third of the share capital, and had been employed with the company for a number of years. During 2008, it was decided that M would resign his directorship and cease his employment with the company and that the majority of his shares would be bought back by the company and cancelled.
M signed a compromise agreement to terminate his employment on 29 May 2009 (although his effective date of resignation as director was 28 February 2009). On the same date, the board resolved that the company would buy back his shares (and that additional borrowing would be required).
M claimed entrepreneurs’ relief on the sale of his shares. However, HMRC disputed this, on the grounds that he was not, throughout the period of one year ending with the disposal of his shareholding, either an officer or an employee of the company.
It was accepted that M’s employment (and directorship) had ceased employment on 28 February 2009. M argued that the disposal of the shares also occurred on that date, because that was when negotiations between the parties were complete, thus giving rise to a binding contract for sale.
Had this been the case, then entrepreneurs’ relief may well have applied. The legislation provides that the date of disposal of the shares is the date of the contract for sale. HMRC agreed that M’s directorship and employment had ceased on 28 February, but argued that there was no evidence of any such binding contract on that date. Even if there had been an oral contract, it would still have depended on getting clearance from HMRC with respect to the share buyback (i.e. that the payment for shares would be treated as a capital payment). That clearance was sought, and granted, but not until 31 March 2009. In addition, while the company’s annual return made up at 6 April 2009 showed that M was no longer a director, he was still shown as holding all of his founder shares at that time. That form (as well as various other statutory documents) confirmed that the contract for disposal had not been concluded by 28 February 2009. The shares were not actually disposal of until 29 May 2009.
In order for entrepreneurs’ relief to apply, M would have had to be a director or an employee throughout the 12 months leading up to the disposal of the shares. As the shares were not disposed of until 29 May, and M had ceased employment and resigned his directorship on 28 February, entrepreneurs’ relief did not apply.