In John Walter Boulting & Others v HMRC [2020] EWHC 2207, a clearance for a purchase of own shares was declared void by HMRC. The company had valued the shares at "materially greater than market value" and not disclosed this. A claim for judicial review failed.
A company Purchase of Own Shares (POS) is given Capital Gains Tax (CGT) treatment for the individual shareholder provided that certain conditions are met under s.1033 CTA 2010. These include that the repurchase:
- Must be wholly or mainly for the purpose of benefiting the company's trade or that of its 75% subsidiary.
Statutory clearance can be obtained from HMRC, under s.1044 CTA, that the necessary conditions for capital treatment are met. This does not include any acceptance by HMRC of the value of the shares.
- Under s.1045(6) CTA, if details provided to HMRC in clearance applications do not fully and accurately disclose all facts and circumstances material for HMRC’s decision, any resulting clearance granted by HMRC is void.
On his retirement Mr Boulting gave 38% of his shares in a trading group to his son and the remaining 8% were repurchased by the holding company.
- His accountants applied for and received, clearance from HMRC under s.1044.
- The clearance application indicated a Share Valuation of £600,000 per share. He declared a capital gain in his Self Assessment return based on proceeds of £4,800,000.
- HMRC, on enquiry into his return, treated the clearance as void and issued a Closure Notice assessing him to Income Tax on the share repurchase. HMRC claimed:
- The company had valued the shares at "materially greater than market value" and not disclosed this in the clearance application. HMRC shares and valuation division valued the shares at only £66,900 per share.
- As a result, the repurchase was not wholly or mainly for the purpose of benefiting the company's trade.
- Mr Boulter applied for a judicial review of HMRC’s decision to void the clearance. He also appealed against the closure notice to the First Tier Tribunal (FTT). This was a late appeal and there was some question as to whether it would be allowed or not.
HMRC argued that it is well established in case law that judicial review is a remedy of last resort. If a claimant has such a remedy then permission to proceed with judicial review will ordinarily be refused and particularly so where the remedy is an appeal to a specialist tribunal, such as a tax tribunal.
The High Court agreed, refusing the request for judicial review but noting that an appeal to the FTT was not necessarily a more suitable alternative.
Amongst the grounds cited by Mr Boulter for judicial review were that he had a legitimate expectation, having received a positive response to the clearance application, that the repurchase would be subject to CGT. HMRC responded that clearance is given subject to the caveat in s.1045(6) CTA 2010 and the expectation is that the claimants will be taxed in accordance with the law. HMRC's CGT manual makes it clear that whilst taxpayers can request a valuation check after a transaction has been carried out, pre-transaction checks will not be made.
Comment
Assuming the late appeal is allowed, we await the FTT decision with interest. In the meantime, this is a reminder that a clearance for a purchase of own shares is not worth anything if HMRC are not given all the facts and if values are so high that they are likely to be challenged by HMRC. It seems a valid point that for a company to vastly overpay for its shares is surely not in the best interests of the trade.
Links
Reorganisations: Case Study 6
Step-by-step with tax clearance: how to buy out a retiring shareholder
Purchase of Own Shares
Subscriber guide
Purchase of own shares: Masterclass
Subscriber detailed checklist & steps
Valuation: Companies
This article outlines the main principles in valuing an unquoted company for tax purposes.
Appeals: Late
When can you make a late tax appeal? What conditions must be met?
External link
John Walter Boulting & Others v HMRC [2020] EWHC 2207
