We wonder what Michelle McEnroe and Miranda Newman thought when the decision was handed down in their case before the First-tier Tribunal [2022] UKFTT 113 TC. Possibly closer to ‘You cannot be serious!’ than ‘O brave new world that has such people in’t!’
The ladies sold a company. That company owed a debt of about £1.1m to a bank. The Heads of Terms referred to the fact that the sale price of £8m was for the acquisition of the company on a debt-free basis. More importantly, the sale and purchase agreement (‘SPA’) provided that the sale price was to be £8m and that the vendors were obliged to show a deed of release and a redemption statement in respect of the loan.
In the event, it appears that the vendors did not show a deed of release or a redemption statement for the very good reason that the loan had still not been repaid by the time the sale completed. Instead, the buyers paid (via their solicitors) £1.1m to the bank in settlement of the debt and £6.9m to the vendors. Probably the parties took the view that it didn’t much matter whether the buyers paid the vendors £6.9m and cleared the debt themselves or paid £8m for a debt-free company. Which, in economic terms, it probably didn’t.
The vendors filed their Capital Gains Tax (‘CGT’) computation on what might be thought the reasonable basis that the amount they had received as consideration for the shares was £6.9m.
Following enquiry, HMRC insisted that the SPA stated a sale price of £8m; the purchasers had parted with £8m; so, for the purposes of CGT, the consideration for the disposal must be taken to be £8m. The fact that only £6.9m had physically reached the vendors was irrelevant: the explanation for not having received the remaining £1.1m was that the vendors ‘had voluntarily discharged the KCPL debt’ – effectively a capital contribution (we return to that below).
The parties could easily have agreed a variation to the contract to the effect that instead of paying £8m for a debt-free company the buyers would pay £6.9m for a company burdened with the £1.1m debt. There is no doubt that that would have meant that the proceeds for the purposes of CGT would have been £6.9m. The vendors invited HMRC to agree that there had, in effect (and perhaps in law), been such a variation to the contract. An alternative analysis arriving at the same result might have been that in failing to provide the deed of release and redemption statement the vendors had breached the terms of the contract and that the vendors had reduced the amount of consideration payable to them accordingly. Either way the total value receivable by the vendors was £6.9m, not £8m.
The Tribunal found in favour of HMRC, saying:
‘I accept the factual point that the sellers did not receive £8m. However, it does not follow that they were/are not entitled to it under the contract. I consider two possibilities. Firstly, there is a possibility that both they are entitled to it and all parties to the contract accept this and it will be paid at a later date. I consider this a possibility on the wording of the contract but as a matter of practicalities and surrounding evidence I consider it extremely unlikely. Secondly, there is the possibility that they are entitled to it under the contract as written but all parties agree that this does not reflect what they meant to agree. To the end that this point leads us to a rectification argument that is not allowable before this Tribunal. To the end that this helps in the contractual interpretation I disagree.’
The possibility that the correct analysis was that the vendors not only did not receive £8m but were never entitled to receive £8m does not seem to have been put to the Tribunal. This will surely be remedied should the matter proceed on appeal to the Upper Tribunal.
But one might be forgiven for thinking that even if £8m was the correct disposal consideration and the £1.1m a capital contribution, that would have achieved the result sought by the taxpayers – surely the £1.1m would fall to be deducted as ‘enhancement expenditure’ on the shares?
Not so: enhancement expenditure counts only if it is ‘reflected in the state or nature of the asset at the time of disposal’. In a Special Commissioners case in 2007 it was held that in general a capital contribution to a company affects neither the ‘state’ nor the ‘nature’ of the shares in the company: and HMRC apply that ruling zealously.
Finally, it may be noted that the case was heard as a default paper case (i.e. without a hearing). It is always open to an appellant to insist on a hearing: one wonders whether the outcome in this case might have been different if the Tribunal had had the benefit of hearing full legal argument on behalf of the taxpayers.
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