Too rich to TiS

In Assem Allam v HMRC [2021] UKUT 0291, the Upper Tribunal (UT) found that the Transactions in Securities provisions did not apply when a wealthy entrepreneur sold his property company to his trading group for nearly £5m in cash, despite earlier clearance being denied. There was no evidence of any tax avoidance motive.

The UT also found that Entrepreneurs’ Relief (ER) did not apply to the disposal and Business Investment Relief had been correctly withdrawn. On a procedural issue, they held that tax returns issued electronically had been validly issued, meaning subsequent enquiries and closure notices were valid.

Dr Allam was a Non-domiciled UK Resident claiming the Remittance Basis who owned three UK-resident close companies with his wife.

• ADL was a property company engaging in some property development activities, including demolition to create a car park and attempts to obtain planning permission for a site it owned. It had shareholder funds of just over £2m and its turnover came almost entirely from property rentals.
• AML, was a trading business with shareholder's funds of £25m.
• Allamhouse (AH), was a holding company formed to acquire AML via a share for share exchange, in connection with the acquisition of Hull City Football Club. 
• In 2011, Dr Allam sold ADL to AML for £4,950,000. He claimed Entrepreneurs’ Relief (ER), now Business Asset Disposal Relief.
  • HMRC enquired into the 2011-12 return and issued a closure notice denying ER on the basis that ADL was not a trading company (Issue 1).
  • In 2017 HMRC issued a counteraction notice under the Transactions in Securities (TiS) rules assessing the proceeds to Income Tax as a distribution (Issue 2).
• In 2012-13, Dr Allam made loans to AH using funds from previously unremitted Egyptian property income. He made Business Investment Relief (BIR) claims such that these remittances were not chargeable to tax in the UK, a claim which HMRC accepted.
• In 2013-14, AH made payments to Dr Allam and his wife in respect of previously declared and unpaid dividends which had been subject to UK tax. HMRC withdrew the BIR previously granted viewing the subsequent repayments as a disqualifying benefit. They issued a closure notice accordingly (Issue 3).
• Dr Allam Appealed both closure notices as well as the TiS counteraction notice:

1. The closure notice denying ER was appealed on the basis that ADL was not undertaking non-trading activities to a substantial extent.
2. The TiS counteraction notice assessing the proceeds from the share sale to Income Tax was appealed on the grounds that tax avoidance was not the purpose (or one of the main purposes) of the transaction.
3. The payments of the unpaid dividends were not chargeable disqualifying events for Business Investment Relief as they did not repay non-qualifying investments.
4. He also appealed on the basis that the Self Assessment filing notices he had received were not validly issued  rendering the enquiry and closure notices invalid. The filing notices had been issued automatically, and not by an officer of HMRC as required by the legislation. 

The First Tier Tribunal (FTT) dismissed the first, third and fourth ground of appeal, but allowed the second. It found that:

1. Whilst ADL had some development activities they were, to a substantial extent, not trading activities. It was a property investment company and not a trading company and ER was denied
2. Any Income Tax benefit was merely incidental and not a main purpose to the sale of the shares in ADL. It came to this decision despite the fact that HMRC had declined to grant tax clearance for a similar transaction in 2009, and that the transaction enabled Dr Allam to use up £2m of CGT losses. It accepted Dr Allam's evidence that the motive was personal one and commercial: he wanted to invest the funds elsewhere.
3. The unpaid dividends were part of a single investment with the loans on which Business Investment Relief had been claimed. The payments were repayments of those loans and should be treated as remittances to the UK and taxed accordingly. Double taxation relief was due for Egyptian tax already paid on these amounts.
4. Although the filing notices were automatically issued, the FTT followed the decision of the Upper Tribunal in Rogers and Shaw and agreed that returns made in response to automated notices remain returns made under s.8 TMA. Enquiries opened into those returns were valid and this part of the appeal was dismissed

The parties appealed the decision to the UT:

• Dr Allam appealed against the refusal of the ER claim, the decision to withdraw Business Investment Relief and the decision that the tax returns were validly issued.
• HMRC appealed the decision that the TiS provisions did not apply.

The UT found that:

1.     The activities of ADL were substantially non-trading and ER did not apply:

• • The taxpayer's contention that the holding of investments and the receiving of rent was not an activity, so could not be considered a non-trading activity, as it required no interaction from the directors or employees of the company, was dismissed.
  • Unrealised property development value can only be taken into account where it is crystallised i.e. planning permission received and any hope value would be reflected in market values included on the balance sheet.
  • The FTT had not erred in law and there were no grounds to interfere with the FTT conclusion.

2.      The TiS provisions did not apply:

• • The FTT had decided that the share sale did not have a main purpose of obtaining an Income Tax advantage, it was an incidental benefit of the transaction which is a subjective test. There were no transcripts of the evidence accepted by the FTT. The UT deduced that:
    • Dr Allam had been in receipt of some £34million in dividends between 2004 and 2011.
    • He had thought that a rule change to the TiS rules in 2010 meant that he did not need to apply for clearance in 2011.
    • That previous clearance had been denied and the transaction used up capital losses had been considered by the FTT. 
    • HMRC wanted to make the case that Dr Allam could have grouped ADL via a share for share exchange and then extracted funds from the group via dividend. The FTT had accepted Dr Allam explanation that it was easier to just sell one company to the other.
  • The UT found that the existence of an alternative transaction which has a different tax result does not necessarily mean that a transaction with a lesser tax result is undertaken for a main purpose of tax avoidance. There is a difference between the reason for the transaction and the tax consequences.
  • HMRC's challenge was to a finding of fact but they had not established any error of law in the FTT findings.

3.     The withdrawal of Business Investment Relief could not be overturned by the UT as:

• • The taxpayer could not provide evidence that the FTT had failed to consider all of the material that it was provided with in reaching its decision.

4.     The tax returns had been validly issued:

• • The FTT was wrong to consider the UT case of Rogers and Shaw without input from the taxpayer, who could have asked HMRC to prove that their systems operated in the same way as in that case.
  • Retrospective legislation introduced by Finance Act 2020 provided that tax return notices issued electronically are treated as being issued by an HMRC officer such that an enquiry can be raised accordingly.

Comment

The decision in this case on the Transactions in Securities (TiS) issue may turn some heads. 

For the TiS to apply, certain conditions must be met. Tax avoidance has to be a main motive, or one of the main motives. HMRC's long standing guidance is that in most cases there is a tax advantage to be had by extracting cash as capital and not as income and that if you seek the lower tax route you must therefore have a tax avoidance motive. The UT does not agree:

a) Dr Allam was able to convince the FTT that tax avoidance was not the main motive: he was wealthly and had received enough past dividends (£34m) not to care about tax: it was simpler for him to sell the property company to his new group than execute a share for share exchange just to extract £5m.

b) The UT, drawing on the House of Lords's decision in CIR v. Brebner [1967] 2 AC 18, confirmed that the existence of an alternative transaction which has a different tax result does not necessarily mean that a transaction with a lesser tax result is undertaken for a main purpose of tax avoidance. Something to bear in mind.

Useful guides on this topic

Transactions in Securities
This note examines the rules for an Income Tax advantage from the perspective of shareholders.

Business Asset Disposal Relief (Entrepreneurs’ Relief): Disposal of a business
Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. When does BADR apply? What is the rate of BADR? How to claim BADR. Case law on BADR.  

SRT: Statutory Residence Test
What is the statutory residency test? Why is it important and how does it work?

Non-domicile status, deemed domicile & tax
Who is non-UK domiciled? What does this mean for UK Income Tax, Capital Gains Tax and Inheritance Tax? What reliefs are available to non-doms?

Remittance basis (overseas income)
What is the remittance basis? Who can claim it and when? What are the advantages of claiming the remittance basis and how much is the remittance basis charge?                                     

Business Investment Relief
Business Investment Relief is a special relief for non-UK domiciled individuals designed to encourage them to remit funds to invest in UK businesses.

External links

Assem Allam v HMRC [2021] UKUT 0291