Mark McLaughlin warns that business disposals can have unexpected and unwelcome tax outcomes if not handled carefully.
‘The Devil is in the detail’ is a well-known saying. It is very apt when it comes to the sale and purchase of assets, for example shares in a property investment company.
The share sale and purchase agreement in this example should be drafted carefully to reflect the economic reality of the transaction and prevent unnecessary tax liabilities.
Unfortunate wording
For example, in McEnroe and Newman v Revenue and Customs [2022] UKFTT 113 (TC), the appellant taxpayers sold a company (‘KCPL’). The sale and purchase agreement stated that the consideration for the shares was £8m. KCPL owed approximately £1.1m to Allied Irish Bank (AIB). On the day of sale, the buyer’s solicitors transferred £8m to the taxpayers’ solicitors, who transferred funds to AIB to redeem the loan owed by KCPL before remitting the balance to the taxpayers.
The taxpayers’ self-assessment returns both showed consideration for the shares as 50% of £6.9m. However, HM Revenue and Customs (HMRC) contended that the consideration should be 50% of £8m. On appeal, whilst the FTT accepted that the taxpayers did not receive £8m but £6.9m, they were entitled to £8m under the contract, which was unambiguous. The FTT concluded that £8m should be used as the consideration figure for tax purposes.
Forward planning
In addition to wording the share sale and purchase agreement correctly, the tax implications of the transaction need to be properly considered in advance, so that the deal can be structured as tax-efficiently as possible and unnecessary tax liabilities can be prevented.
For example, in Tedesco v Revenue and Customs [2022] UKFTT 171 (TC), the taxpayer held 218 out of 270 shares in a company (E). The taxpayer (for the shareholders) and the purchaser’s representative (‘SAA’) agreed that the trust would purchase the entire share capital of E for £1.5m. The sale of E was staggered, with 132 shares in E (‘sale shares A’) being sold at first completion, with the remaining 138 shares (‘sale shares B’) being sold at second completion. E had borrowed funds from RBS. The share sale agreement indicated that the shares in E would be bought free of any secured debt.
The trust paid £800,000 to the taxpayer’s solicitors for 132 shares. The solicitors discharged E’s borrowing of £693,286 from RBS and transferred £96,500 to the taxpayer. The taxpayer then held 138 shares in E and the trust 132 shares. Subsequently, the trust paid £700,000 for the taxpayer’s remaining 138 shares. The taxpayer tried to claim the cost of repaying E’s borrowing of £693,286 as a cost of disposal of its shares, but HMRC disagreed. The FTT concluded that the taxpayer’s discharge of E’s borrowing was not expenditure ‘on’ the shares, and it was not expenditure that was reflected in the ‘state or nature’ of the shares. Thus, the cost to the taxpayer of repaying E’s borrowing was not an allowable deduction (within TCGA 1992, s 38(1)(b)).
Practical tip
The lesson from Tedesco is perhaps best summed up by the FTT: “…it can transpire that a person has ordered his affairs in such a way that the tax is more than it might otherwise be. Unfortunately for the appellant, it is not relevant to the determination of this appeal that a different tax consequence might attach to different facts if the appellant had instead followed a different course of action.” HMRC will generally tax the transaction according to what actually happened; this will not necessarily be what was intended to happen.
