The recent First-tier Tribunal decision in Cooling [2015] UKFTT 223 (TC) is more complex than it appears to be.
Mr Cooling sold the shares in his company for a cash consideration of some £10m. But the day before the sale he purchased certain assets from the company at an agreed price of some £300,000, to be left outstanding as a debt due to the company. This is not an unusual strategy: usually the debt would be cleared on completion out of the proceeds of sale. However, in Mr Cooling’s case, the sale contract provided that the buyer of the shares would take over from Mr Cooling his liability to pay the company the £300,000. HMRC asserted that the assumption of this liability was further consideration for the disposal of the shares so that the total consideration for the shares was £10.3m. The Tribunal found in favour of HMRC. So far, so obviously right.
However, this case cannot sensibly be considered without regard to the earlier Court of Appeal decision in Collins v Addies [1992] STC 746. In that case, shares in a company were sold: the vendors were indebted to the company: and the sale was made on terms that the buyer assumed responsibility for the debt owed by the vendors to the company. The facts were, in other words, very similar to those in Cooling. But in Collins v Addies the dispute was not as to the CGT treatment of the taking over of the liability. Rather, HMRC pointed out that (a) a loan or advance had been made by a company to its shareholders, (b) the shareholders had been released from their liability to repay the amount of that loan or advance, so (c) a tax charge arose under the “loans to participators” legislation in respect of the amount released. And the Court of Appeal agreed.
Fast forward to Mr Cooling. On the face of it the amount left outstanding on his asset purchase would fall to be treated as a loan or advance, so you would expect that the same issues that arose in Collins v Addies would have been considered in his case. It’s odd that the point doesn’t seem to have occurred to anyone. If it had, we think the conclusion would inevitably have been that as (following Collins v Addies) the £300,000 fell to be charged to tax under the “loans to participator” rules, it could not also have been charged to CGT: so that the consideration for CGT purposes was indeed £10m.
But it would have been so much simpler if Mr Cooling had followed normal practice and settled the outstanding debt from the proceeds of sale of the shares. What a tangled web we weave…
