The tax blunders of Mr Khan

The case

In Bostan Khan v HMRC [2020] UKUT 0168, the Upper Tribunal (UT) rejected a taxpayer’s argument that a company purchase of his shares was not a distribution as it was part of his wider agreement to purchase a controlling interest in the company.

The key facts were as follows:

  1. Mr Khan wished to purchase a cash-rich company. Its owners were keen to avoid the unfavourable taxation of a pre-sale dividend and hoped to pay capital gains tax. This was therefore a classic ‘money box’ company.
  2. He agreed to purchase the entire share capital of 100 shares for cash of £1.95m plus the net asset value of the other assets. On the same day, he arranged for the company to purchase 99 out of his 100 shares for cash of £1.95m to allow him to pay proceeds over to the vendors.
  3. HMRC raised an income tax assessment on the £1.95m on the basis that he had failed to meet the qualifying five-year ownership condition for a purchase of own shares to be treated as a capital disposal (and there were probably other conditions that he failed too).
  4. The First Tier Tribunal (FTT) agreed with HMRC. The minimum period of ownership was not met and it dismissed his appeal.

The taxpayer then appealed to the Upper Tribunal arguing that the company buy-back formed part of the share sale agreement and should not be taxed separately.

This tribunal found that the share sale and the share purchase were executed as separate agreements and advised on separately. Also to reach any other conclusion would be problematic because then the purchase of own shares would be taxable on the sellers. As the selling shareholders had sold their shares to Mr Khan and only the shareowner could receive a distribution, it was clear that Mr Khan received the distribution and was entitled to receive it. The appeal was therefore dismissed.

Forbes Dawson comment

I am not surprised that Mr Khan failed at tribunal because in many ways this is a disastrous piece of tax structuring. There does not seem any reasonable interpretation that can conclude anything other than the fact that Mr Khan is subject to income tax on the £1.95m. However if proper advice had been sought at the time there may have been a few ways to secure the intended result:

  1. Subject to obtaining clearance the sellers could have been bought out by a company purchase of own shares after Mr Khan had acquired a small quantity of shares. Assuming that they met the capital treatment conditions then they could have obtained capital gains tax treatment.
  1. Mr Khan could have set up a new company to buy the shares which would then use a dividend from the acquired company to pay its shareholders. Although the vendors would have to be wary of transactions in securities issues here (where HMRC has the power to assess gains as dividend income) this should be protected by ‘the fundamental change in ownership’ exemption because the company fully comes under the ownership of a new owner.

Also given that Mr Khan was effectively buying cash which he would return to the vendors I hope that he factored in his £10,000 stamp duty liability (at 0.5%) in negotiations. Clearly that will now be the least of his worries!




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