HM Revenue and Customs v RJ Taylor
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 November 2010 |
| Neutral Citation | [2010] UKUT 417 (TCC) |
| Date | 23 November 2010 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2010] UKUT 417 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Roth J.
Aparna Nathan (instructed by the Solicitor to HM Revenue and Customs) for the appellant.
Ben Staveley, representative, for the respondents.
The following cases were referred to in the judgment:
Bibby v Prudential Assurance Co LtdTAX [2000] BTC 158
Canada Safeway Ltd v IR CommrsELR [1973] 1 Ch 374
Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300; 54 TC 101
Income tax - Enterprise Investment Scheme (EIS) - Individuals qualifying for relief - Connected persons - Conditions concerning loan capital - Whether loan capital and share capital to be aggregated - Whether share capital to be taken at nominal value or subscribed value - HMRC's appeal allowed - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 291Bs. 291B.
This was an appeal by HM Revenue and Customs from a decision of the First-tier Tribunal ([2009] UKFTT 336 (TC); [2010] TC 00277) on the meaning of "connected person" for the purposes of the Enterprise Investment Scheme ("EIS") provision in the Income and Corporation Taxes Act 1988, s. 291B(1)(b).
The respondent taxpayers were directors and shareholders of a company which was a qualifying company for the EIS. Both respondents extended loans to the company. In the relevant tax years they held proportions of the issued shares which were substantially less than the 30 per cent threshold in s. 291B(1)(a). In the relevant tax years the amounts they had loaned to the company, save in the case of one respondent in one year, exceeded 30 per cent of the company's total borrowing.
HMRC contended that s. 291B(1)(b) set out a composite category such that the amounts of loan capital and issued share capital were to be aggregated and an individual who held more than 30 per cent of that aggregation was accordingly a "connected person". Further, the nominal value of the share capital had to be used for the purpose of that calculation. The FTT decided, upholding the argument of the respondents, that on a purposive construction, para. (b) set out a double category such that the 30 per cent threshold was applied both to the loan capital and to the issued share capital. Accordingly, if an individual held more than 30 per cent of the loan capital but less than 30 per cent of the issued share capital, the para. (b) threshold was not crossed and he was not a connected person. Hence on the interpretation adopted by the FTT, the respondents were not connected persons, whereas on HMRC's interpretation, save for one respondent in one year, the respondents were connected persons and thus ineligible for EIS relief.
HMRC appealed, arguing that on its natural meaning, the wording of para. (b) clearly expressed a composite, aggregated category. The respondents' case was that the two elements were not to be aggregated, but if they were the issued share capital should mean the amount subscribed for the shares since that would more realistically represent the financial interest advanced to the company by the individual, and it would preclude the loan capital from disproportionately outweighing the share capital in a case where the shares had a very low nominal value compared to the amount subscribed.
Held, allowing the appeal:
1. The expression "issued share capital" was used frequently throughout ICTA. In the absence of a special definition for EIS purposes, the phrase had to be given the same meaning which was well-established; it was clear that issued share capital in para. (b) referred to the nominal value of the shares. (Canada Safeway Ltd v IR Commrs [1973] 1 Ch 374 applied.)
2. The legislature had manifestly viewed loan capital as relevant in this context. On either side's construction, loan capital was to be regarded as bringing influence when combined with some holding of the issued share capital. The result that a small minority shareholder who provided a very high proportion, or even the entirety, of the company's loan capital would never be regarded as having the significant influence envisaged by the concept of a connected person was not a sensible or reasonable construction of the provision, having regard to its overall purpose. The rules on eligibility for EIS relief required clarity. The selection of a single, uniform boundary based on a percentage proportion was generally somewhat arbitrary. Such rules might often give rise to anomalous cases. The FTT, in its focus on such potentially anomalous results of HMRC's interpretation, paid insufficient regard to the consequences of the alternative interpretation which it adopted. An individual who provided a company with over 30 per cent of its aggregate loan capital and share capital, where his contribution to loan capital alone was well over 30 per cent although his holding of share capital was below 30 per cent, might reasonably be considered to have potential influence in the company's affairs, even if there were no formal restrictions in the loan terms. He would often not be a purely outside investor of the kind that EIS relief was designed to benefit.
3. In some cases the degree of divergence between nominal and subscribed share values and the particular ratio of lending to share investment might combine to produce a result that seemed harsh. But that was the result of the use of the nominal value in the computation of share capital. That that value was the correct one to use was well-established. It would be wrong to distort para. (b) into a bifurcated category so as to counter-balance the use of nominal share values that produced anomalous results in some cases. Having regard to the statutory context and purpose, para. (b) should be interpreted, in accordance with the more natural meaning of the words, to refer to a single, composite category to which the 30 per cent threshold was applied. That interpretation, as opposed to the alternative, should not cause particular problems of uncertainty for an individual seeking to claim EIS relief.
Roth J: Introduction
1. The Enterprise Investment Scheme ("EIS") was introduced under tax legislation with effect from 1 January 1994, replacing the Business Expansion Scheme which had existed since 1981. The provisions dealing with EIS are designed to encourage investment by individuals in ordinary shares of unquoted companies. With that objective, relief from income tax is provided for investment in qualifying companies. In order for an individual to receive such relief, he must not be "connected" with the company in which he makes the investment. It is common ground in this appeal that the purpose of that condition is to preclude EIS relief from being used by individuals to fund their personal companies or companies over which they have significant influence.
2. This case raises a short, but far from easy, point of interpretation of one of the criteria whereby it is determined whether an individual is such a connected person. By its decision of 25 November 2009 ([2009] UKFTT 336 (TC); [2010] TC 00277), the First-tier Tribunal, Tax Chamber ("the FTT") rejected the interpretation of that criterion applied by the Commissioners for Her Majesty's Revenue and Customs ("HMRC"). With permission granted by the FTT, HMRC appeal.
3. The facts in this case are not in dispute. Wrapit Ltd ("the Company") was a qualifying company for the EIS. It was incorporated on 15 February 2000 and traded as a website-based wedding list gift business until it went into administration in August 2008. The Company's authorised share capital was £100,000 divided into 10,000,000 shares of 1p each. Both Respondents were directors of the Company and the first Respondent, Mr Taylor, was the Company secretary.
4. The Company was funded by the issue of subscriptions for shares, bank lending and loans from the directors, several individuals and from another company, Strand Associates...
To continue reading
Request your trial
-
RKW Ltd
...purposive construction applies neutrally. It is open to both the Appellants and HMRC to seek such a construction: R & C Commrs v Taylor[2011] BTC 1501; [2011] UKUT 417. [196]It is true to say that Mr Gray secured control of the Appellant. He perhaps could at some future date extract untaxed......
-
HMRC v Mr R J Taylor & Mr N Haimendorf
...FTC/43/2010 [2010]UKUT 417 (TCC) Income tax – EIS relief – section 291B of ICTA - “Connected person” – condition concerning loan capital – whether loan capital and share capital to be aggregated whether share capital to be taken at nominal value or subscribed value UPPER TRIBUNAL (TAX AND C......
-
The Commissioners for HM Revenue and Customs v (1) Mr N R J Taylor (2) Mr N Haimendorf
...FTC/43/2010 [2010]UKUT 417 (TCC) Income tax – EIS relief – section 291B of ICTA - “Connected person” – condition concerning loan capital – whether loan capital and share capital to be aggregated whether share capital to be taken at nominal value or subscribed value UPPER TRIBUNAL (TAX AND C......