28 May 2019
Client: “I’m selling my business. How much tax will I have to pay?”
Advisor: “10%”
Client: “Great!” [hangs up phone]
I’ve been thinking recently about writing a screenplay. This one’s a three-part Sunday night courtroom drama that I reckon the BBC’s a sure thing to snap up.
The advisor in my screenplay will spend most of their time squirming uncomfortably in their seat whilst HMRC’s legal team pick and scratch at the case of the unfortunate client who has found himself in the dock.
Let me explain.
A ten percent rate of capital gains tax is secured only on the making of a valid claim to Entrepreneurs’ Relief. Assumption is the mother of something best not mentioned here, and in the 11 or so years since its introduction as a simple piece of legislation, Entrepreneurs’ Relief has:
- Become much more valuable, the saving having been 8% on a lifetime limit of £1m of gains (£80,000) when first introduced, is now 10% on a lifetime limit of £10m of gains (£1m of tax).
- Become much more complex, with taxpayers finding new and exciting ways to fit themselves within the rules and the lawmakers throwing in page after page of new legislation in an attempt to stop them.
The result of these two things is that increasing care needs to be taken to ensure the validity of any claim to this valuable relief, and HMRC are increasingly interested in scrutinising that validity.
Recent examples
To illustrate the point, there have recently been the following Entrepreneurs’ Relief cases passing through our legal system:
HMRC v McQuillan First Tier Tribunal and Upper Tier Tribunal
Castledine v HMRC First Tier Tribunal
Hunt v HMRC First Tier Tribunal
Warshaw v HMRC First Tier Tribunal
In each case, the point in question has been whether the taxpayer, and you’d be forgiven for thinking it’s a simple question, owned 5% of the sold company’s ordinary share capital.
The McQuillans’ headache was caused by loans which, many years prior to sale, the bank had required be converted into 0% preference shares.
For Castledine, it was a mere £20 worth of treasury shares (amongst a share capital of over a hundred million) which no-one had ever got round to cancelling.
Mr Hunt’s argument centred on measuring the number of shares in issue as compared to their nominal value.
And like the McQuillans, Mr Warshaw’s dispute turned on the treatment of the company’s preference shares.
Each of these taxpayers has seen the financial joy of their business sale ruined by the stress and cost of years of HMRC inquiry, followed by legal proceedings which lasted far in excess of the three Sunday nights they’ll take in my dramatisation.
On second thoughts, perhaps I’ll forget about my screenplay and stick to giving tax advice instead. And today’s advice is that the correct answer to “how much tax will I pay?” is always “it depends”, followed by your advisor taking the time to understand your position properly and to structure the transaction appropriately.
To discuss Entrepreneurs' Relief or any other tax queries you may have, please do not hesitate to contact me or your local UHY specialist for further advice.
