Early last year we reported on the tax case involving Jasper Conran (see here). The main thrust of the case involved Jasper Conran (via an LLP in which he was the 99% member) selling a business worth £1 to the subsidiary of one of his companies for £8.25m. HMRC unsurprisingly tried to argue that this was a distribution which Jasper should be taxed on accordingly. Here they pointed to the definition of a distribution which is as follows in section 1000 of Corporation Tax Act 2010:
2. Any other distribution out of assets of the company in respect of shares in the company
3. Various issues of securities
HMRC lost in the First Tier Tribunal (FTT) because the Tribunal ruled that the distribution was not ‘in respect of shares’ but rather in his capacity as the majority member of the LLP. Although we were surprised at this decision (and suggested that it may be overturned), we suggested that it provided some comfort against the argument advanced by some commentators that loan write-offs between companies held by the same individual shareholder should be treated as a distribution (because the creditor company is effectively transferring value to the debtor company). Now, as we predicted, the ruling of the FTT has been overturned by the Upper Tribunal and Conran is facing tax on an £8,249,999 dividend.
Upper Tribunal case
The case involved a detailed discussion about whether the FTT should have decided that the distribution was not “in respect of shares”. Much was made of the onus being on Conran to explain why he had received £8.25m more than what the business was worth. In this particular case, the waters had also been muddied by a complex argument about the value of the business – which HMRC said was £1 because a key piece of intellectual property had been excluded from the transfer. Broadly, the take-home message from this case is that the distribution legislation is wide and in particular the phrase “in respect of shares” will be construed widely. If you are a shareholder who receives value from your company, then you will need a very good reason as to why your shareholding had nothing to do with the value that you receive.
Forbes Dawson view
This is not a surprising case. The surprise came when the FTT took its original lenient approach. However, the question around whether intercompany loan write-offs (and other similar things) can be classed as distributions is now back on the agenda. In particular, I would be interested in hearing HMRC’s view about whether the simple case of a loan write-off between two companies owned by the same individual will give rise to a distribution. I suspect that the answer will once again come down to whether the write-off is “in respect of shares” but now we know that we have to treat this phrase widely. Clearly, there would only be a distribution to the extent that the debtor company is ‘good for’ the loan and so there should be no issue here for insolvent companies. Perhaps the taxpayer’s best bet will be to rely on some kind of purposive argument by pointing out that he personally is in no better position as a result of the write-off. However, when a trade is transferred to another company in a statutory demerger, special ‘exempt distribution’ rules need to be relied on which seems to undermine this argument. It would be useful to see a tax case on this precise subject!
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