The vital paper trail

Two recent cases have highlighted that the key to achieving the right tax treatment is ensuring that the legal documentation implementing the steps is accurate and complete. This is of vital importance for lawyers and tax advisers alike.

The First-tier Tribunal (FTT) cases both concerned whether or not shares had been issued, and had different outcomes for the taxpayers concerned. What they have in common is that they show that what an investor believes should have happened, does not necessarily reflect what has occurred in reality.

Alberg: no documents, no relief

In Alberg v HMRC [2016] UKFTT 621, Alberg (A) entered into a business venture with a business partner. A invested £250,000 into a food and drinks company in financial difficulties in February 2008. Shares issued under the Enterprise Investment Scheme (EIS) are afforded favourable tax treatment. However, such reliefs are only available for shares issued to the relevant individual.

It was undisputed that A held one share in the company, but the question was whether he was issued a further 249,999 shares. The FTT stated that the burden of proof was on A and his appeal would fail unless he produced sufficient evidence to persuade it that, on the balance of probabilities, additional shares were in fact issued to him in consideration for £250,000.

A was unable to provide direct evidence that the shares had been issued to him. There were no register of members of the company, no share certificates relating to shares in the company held by him and no annual return of the company with details of its shareholders. The only evidence he produced was a draft shareholders’ agreement attached in an email from his solicitors to him and his business partner in relation to the acquisition of the business. This showed that it was contemplated that the authorised share capital of the company would be increased and further shares issued (including a further 249,999 shares to A); however no executed version of this document was produced.

The FTT did not accept the proposition that “the fact that solicitors based in the City of London produced a draft agreement for certain things to be done means that, on the balance of probabilities, those things were done. There were significant steps to be taken to get from the draft agreement produced to the issuance of shares… No evidence was produced of such steps having been taken”.

Whilst the FTT accepted that its decision might appear to be an inequitable outcome, given that A actually invested and lost £250,000, at the heart of the decision was the fact that Parliament specifically required that the shares in question be issued to the taxpayer in order for the share loss relief to apply.

Murray-Hession: relief, hard won

Murray-Hession v HMRC [2016] UKFTT 612 involved the question of whether a taxpayer (MH) had subscribed for shares, this time for the purposes of being able to claim share loss relief under s 16 of the Taxation of Chargeable Gains Act 1992.

MH stated that he had agreed with the then sole shareholder, Gray, to invest £272,000 in a company called Geezer. In exchange, he would receive a 22.5% stake in the ordinary share capital of the company.

HMRC contended that MH had in fact lent the money to Geezer and that the company did not issue any new share capital beyond the £100 subscribed by Gray on incorporation, instead subdividing its 100 £1 shares into 1,000 10p shares. They also contended that as a result of the steps, MH made no loss on the disposal of the shares, and that disposal was of shares acquired, not subscribed for.

The FTT found, as a matter of fact, that MH had an agreement with Gray that he would invest £272,000 of his own money in Geezer and that this investment would be by way of subscription for shares. It held that Gray was, from the outset, holding a percentage of the shares as nominee for MH until they could be registered in his name, and that payment of the funds to the company and not to Gray was inexplicable on any other basis. It allowed the claim for relief that was previously disallowed by HMRC.

Although the cases produce different outcomes, it is key to ensure that the relevant documentation has been completed appropriately. If it had, both taxpayers should have been able to claim the applicable relief without challenge from HMRC.