John Walter Boulting v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
JudgeJarman
Judgment Date12 August 2020
Neutral Citation[2020] EWHC 2207 (Admin)
Date12 August 2020
Docket NumberCase No: CO/101/2020
Year2020
CourtQueen's Bench Division (Administrative Court)

[2020] EWHC 2207 (Admin)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

ADMINISTRATIVE COURT

Cardiff Civil and Family Justice and Centre

2 Park Street, Cardiff CF10 1ET

Before:

HIS HONOUR JUDGE Jarman QC

Case No: CO/101/2020

The Queen (on the application of)

Between:
(1) John Walter Boulting
(2) PSC Training and Development Group Limited
Claimants
and
The Commissioners for her Majesty's Revenue and Customs
Defendants

Mr Philip Ridgway (instructed by Burges Salmon) for the claimants

Ms Sadiya Choudhury (instructed by General Counsel and Solicitor to HMRC) for the defendant

Hearing dates: 5–6 August 2020

Approved Judgment

HH JUDGE Jarman QC:

1

This is the rolled up hearing of the claimants' application for permission to bring a judicial review claim of HMRC's decision dated 9 October 2019 to treat its statutory clearance (the clearance) given on 22 October 2014 as void. The claimants also seek to challenge HMRC's consequent decision to assess the first claimant (Mr Boulting) to income tax (IT) in respect of his sale of shares in the second claimant (the company) to the company for the sum of £4,800,000, instead of capital gains tax (CGT) as indicated in the clearance.

2

The basis on which HMRC now says that the clearance is void is that it was made without full or accurate disclosure of facts or circumstances, namely that the shares in question were each worth £66,900 and not £600,0000 which was the valuation which the claimants relied upon in applying for the clearance. Accordingly, as the price paid for the shares was considerably more than their market value it cannot be for the benefit of the company's trade but rather for the benefit of Mr Boulting. Thus, the appropriate tax on the purchase price received by Mr Boulting is IT and not CGT.

3

The claimants' response to this is that in applying for clearance the company was not required to provide a valuation of the shares but only to give the price paid and could not then have known that HMRC would later take a different view of valuation, which in any event was irrelevant to the clearance procedure. The company could not disclose what it did not then know.

4

Before setting out the background in more detail, it is necessary to refer to the statutory scheme. Prior to the UK joining the EEC, it was not permissible in this jurisdiction for a company to buy its own shares, unlike in other member states. This hindered shareholders who wished to sell shares in a family run company to do so in such a way as to ensure that ownership of the company was kept in the family. Accordingly, the Companies Act 1980 permitted such a sale in certain circumstances. The Finance Act 1982 introduced fiscal advantages to shareholders selling their shares to the company for the benefit of the company's business, for example by allowing the smooth transition of the management of the company upon the retirement of a substantial shareholder. The fiscal advantage was that the tax paid on the price of the shares would, if certain conditions were met, be at the lower CGT rate rather than the higher IT rate. In order to assist with planning, a clearance mechanism was established whereby HMRC confirms in advance whether the conditions are met.

5

The current statutory regime is set out in the Corporation Tax Act 2010 (the 2010 Act). Section 1033 deals with the purchase by an unquoted trading company of its own shares as follows:

“(1) A payment made by a company on the … purchase of its own shares is not a distribution for the purposes of the Corporation Tax Acts if—

(a) the company is an unquoted trading company, or the unquoted holding company of a trading group, and

(b) either Condition A or Condition B is met.

(2) Condition A is that—

(a) the … purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the company or any of its 75% subsidiaries,

(b) the … purchase does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is— (i) to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or (ii) the avoidance of tax, and

(c) the requirements set out in sections 1034 to 1043 (so far as applicable) are met.”

6

Section 1044 deals with advance clearance of payments by HMRC in this way:

“(1) A company may make an application under this section to the Commissioners for Her Majesty's Revenue and Customs (“the Commissioners”) before making a payment on the … purchase of its own shares.

(2) If, before the payment is made, the Commissioners notify the company that they are satisfied that section 1033 will apply to it, the payment is treated as one to which section 1033 applies.

(3) If, before the payment is made, the Commissioners notify the company that they are satisfied that section 1033 will not apply to it, the payment is treated as one to which section 1033 does not apply.”

7

The details of the advance clearance mechanism is set out in the following supplementary section, section 1045, thus:

“(1) An application under section 1044—

(a) must be in writing, and

(b) must contain particulars of the relevant transactions.

(2) The Commissioners may by notice require the applicant to provide further particulars for the purpose of enabling them to make their decision.

(3) The power under subsection (2) must be exercised within 30 days of the receipt of—

(a) the application, or

(b) any further particulars previously required under subsection (2).

(4) If a notice under subsection (2) is not complied with within 30 days, or any longer period that the Commissioners may allow, the Commissioners need not proceed further on the application.

(5) The Commissioners must notify their decision to the applicant—

(a) within 30 days of receiving the application, or

(b) if they give notice under subsection (2), within 30 days of the notice being complied with.

(6) If particulars provided under this section do not fully and accurately disclose all facts and circumstances material for the decision of the Commissioners, any resulting notification by the Commissioners is void.”

8

The issue of whether in this case the particulars provided by the company for clearance fully and accurately disclosed all facts and circumstances material for the decision of HMRC in giving the clearance is at the heart of the dispute between the parties.

9

The facts may be summarised for present purposes as follows. In 1993 Mr Boulting co-founded a company to deliver apprenticeships and career development programmes in the South West of England. Business thrived. This company became a wholly owned subsidiary of the company, of which Mr Boulting was the majority shareholder. In 2013, when Mr Boulting had passed retirement age, the board of the company discussed a new management strategy. It was decided that he would retire as a director to allow his son Mark to take this strategy forward.

10

Advice was sought from the company's accountants, after which it was proposed that Mr Boulting would give 38% of his shareholding to his son and sell 8% to the company. This proposal was discussed at a board meeting in September 2014 and it was decided that the purchase was necessary for the long term sustainability of the company. A valuation of the company's shares was undertaken by Mark Boulting who has an MBA, and advice taken from the accountants as to methodology.

11

On 9 October 2014, the accountants applied to HMRC for clearance and for confirmation that the proposed purchase would be subject to CGT only. The guidance given by HMRC as to the necessary information for such an application was at that time set out in a document called SP2/82. The application contained all of the required information, including that the purchase was to be made wholly or mainly for the purpose of benefiting the trade carried on by the company and was not part of a scheme to enable Mr Boulting to avoid tax or to participate in the profits of the company without receiving a dividend.

12

Such applications are dealt with by HMRC's clearance team. Members of that team do not consider the valuation of the shares. They do not have the expertise to do so and market valuation as such is not part of the conditions for granting clearance. Such valuations are dealt with by HMRC's shares and asset valuation department. On 22 October 2014, HMRC gave clearance in which it was stated that section 1033 of the 2010 Act would apply to the proposed purchase in the circumstances described in the clearance application. The company's accountants notified HMRC in February 2015 that the purchase had been completed in accordance with the clearance.

13

Accordingly, in Mr Boulting's self-assessment tax return for the year ended 5 April 2015, the tax payable on the price which he received for the shares was calculated on the basis that it was CGT. In October 2016 HMRC launched an enquiry into that assessment, which culminated with HMRC issuing a closure notice on 9 October 2019 stating that Mr Boulting owed £1,008,621. This was largely because HMRC decided to treat the clearance as void on the basis that the company had used a value for the shares it purchased which was “materially greater than market value” and that the company had not disclosed this as a fact and circumstance material for the decision to grant clearance.

14

Mr Ridgway, in seeking permission to proceed by way of judicial review to challenge those decisions on behalf of the claimants, submits that there are five arguable grounds. There is some overlap between them. Ms Choudhury, for HMRC, submits none of them is arguable. The issue of the correctness and relevance of the value of the...

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