A recent Tribunal case (John Kenneth Moore v HMRC  TC04903) illustrates how forgetting small details can lead to very costly tax consequences when making a claim for Entrepreneurs’ Relief (‘ER’).
John Moore was a 30% shareholder in Alpha Micro Components Ltd (‘Alpha’). During 2008 there was a disagreement amongst the shareholders over the direction of the business, resulting in Mr Moore agreeing to leave. The parties agreed to enter into a Compromise Agreement for the termination of Mr Moore’s employment, and for Alpha to buy back his shares. Forms were filed at Companies House stating that the director had resigned on 28 February 2009. However, the company did not resolve to repurchase his shares until 29 May 2009.
The ER conditions require that the shareholder is an officer or employee of the company throughout the period of one year ending with the date of the disposal. HMRC successfully contended that Mr Moore failed these conditions by virtue of his earlier resignation from the company.
Mr Moore claimed that the disposal of his shares was effective from the date of the compromise agreement, on the basis that there was an unconditional obligation for the company to buy back his shares. In dismissing this argument the Tribunal noted that the Companies Act 2006 requires there to be a special resolution passed before a purchase of own shares can validly take place. As a matter of fact this did not take place until 29 May 2009 and so the company was incapable of entering into a valid contract any earlier than this.
This case once again serves to demonstrate the importance of seeking professional advice before undertaking any transaction of this kind. The loss of ER could have been avoided if the conditions were thought through properly. In particular, it was noted that despite Mr Moore resigning from the board he continued to do work for the company, but via his own personal service company and not as an employee. If Mr Moore had been put on a reduced-status employment, or given gardening leave, then he would have satisfied the conditions. Equally, if the board had passed the special resolution at the time the heads of terms for his departure were drawn up this would have satisfied the Companies Act rules.
Less haste, more Entrepreneurs’ Relief!
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