Khan v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 30 April 2021 |
| Neutral Citation | [2021] EWCA Civ 624 |
| Year | 2021 |
| Court | Court of Appeal (Civil Division) |
2021 April 20; 30
Revenue - Income tax - Distribution - Shareholders selling entire share capital of company to taxpayer - Taxpayer’s purchase of share capital funded by loan from company - Company immediately buying shares back from taxpayer - Whether taxpayer liable to income tax on proceeds of buy-back as distribution out of assets of company in respect of shares - Whether taxpayer liable as person “receiving or entitled to” distribution - Whether share sale and buy-back transactions to be viewed as single composite transaction - Whether shareholders deemed to be persons receiving and entitled to distribution -
The taxpayer agreed to acquire a company from the company’s three shareholders by entering into connected share sale and buy-back transactions. Pursuant to the share sale agreement the taxpayer purchased the company’s entire issued share capital of 99 shares from the shareholders for £1.95m in cash plus an amount equal to the company’s net book value of £18,771. He was then appointed as director of the company with immediate effect and the shareholders resigned as directors. Less than 40 minutes later, pursuant to the buy-back agreement, the company bought back from the taxpayer 98 of those shares for cash consideration of £1.95m, leaving him with the sole remaining share. The cash needed to fund the taxpayer’s initial purchase of the shares had been provided by the company loaning the sum of £1.95m to the taxpayer, whose obligation to repay that loan was set off against the company’s obligation to pay him £1.95m as the price of the 98 shares it was purchasing under the buy-back agreement. The result of the transactions was that the taxpayer acquired the company and became its sole shareholder at a personal cost to him of £18,771 and the shareholders between them received a sum equal to the value of the company’s distributable reserves of £1.95m. The revenue issued a closure notice in respect of the taxpayer’s self-assessment income tax return, increasing his liability to income tax by nearly £600,000 on the basis that the £1.95m paid to him by the company under the buy-back agreement (“the share buy-back proceeds”) was a distribution that was taxable under section 383(1) of the Income Tax (Trading and Other Income) Act 2005F1 and that the taxpayer was the person “receiving or entitled to” that distribution within section 385(1)(b). The Upper Tribunal dismissed the taxpayer’s appeal against the closure notice, holding that the taxpayer had both received the share buy-back proceeds and had been entitled to them. The taxpayer appealed, contending that, since he had been bound to use the share buy-back proceeds to repay the loan, he had neither had control over nor benefited from those proceeds and that consequently he could not be said to be the person “receiving or entitled to” them. Those persons, so the taxpayer argued, were the shareholders.
On the taxpayer’s appeal—
Held, dismissing the appeal, that, on its true construction, section 385(1)(b) of the Income Tax (Trading and Other Income) Act 2005 was not concerned with the overall economic outcome of a series of commercially interlinked transactions but only with the question of who was “entitled to” or had actually “received” the distribution in question; that although in some cases the identification of the person who had received or been entitled to a distribution could involve having to stand back and look at the matter realistically, ignoring any technical or artificial legal arrangements that might have been put in place to obscure their identity, the fact that the question was one of actual receipt or entitlement at the time of the distribution meant that section 385(1)(b) required the focus to be on the situation at that time, not on anything that happened to the money afterwards or on how the person from whom the company was buying the shares came to be in the position to sell them in the first place; that the concept of “receipt” of a distribution did not contain an implicit requirement that the person who received the distribution also had practical control over it and being “entitled to” a distribution meant no more than having the right to the distribution and contained no implicit requirement of benefit; that, on the facts of the present case, the taxpayer had been entitled to and had received the distribution for the purposes of section 385(1)(b); that, in particular, the fact that following the share sale and buy-back transactions the taxpayer had ended up as the owner of the company’s sole remaining share at a modest personal outlay while the shareholders ended up with a sum equivalent to the company’s previously distributable reserves told one nothing about who had received or been entitled to the distribution when it was made; that, even viewed as a composite whole, the transactions could not be characterised as a buy-back arrangement made directly between the shareholders and the company, ignoring the genuine role played by the taxpayer and disregarding his legal rights and obligations; that, rather, the taxpayer had had a contractual entitlement to the share buy-back proceeds and had received those proceeds notwithstanding the fact that their payment had been set off against his liability to repay the loan to the company; and that, accordingly, the taxpayer was liable to income tax on the share buy-back proceeds (post, paras 52, 57, 72–74, 80, 82–86, 87, 88).
The following cases are referred to in the judgment of Andrews LJ:
Aplin v White [
Bupa Insurance Ltd v Revenue and Customs Comrs
Ensign Tankers (Leasing) Ltd v Stokes [
Henrikson v Grafton Hotel Ltd [
Inland Revenue Comrs v Scottish Provident Institution
Macpherson v Bond [
Piggott v Staines Investments Ltd [
Ramsay (WT) Ltd v Inland Revenue Comrs [
Revenue and Customs Comrs v Anson
Sainsbury (J) plc v O’Connor [
Timpson’s Executors v Yerbury (HM Inspector Of Taxes) [
UBS AG v Revenue and Customs Comrs
Williams v Singer [
Wood Preservation Ltd v Prior [
No additional cases were cited in argument or referred to in the skeleton arguments.
APPEAL from the Upper Tribunal (Tax and Chancery Chamber)
On 5 July 2017, following a tax inquiry, the Revenue and Customs Commissioners issued a closure notice in respect of the self-assessment income tax return of the taxpayer, Bostan Khan, for the tax year 2013–2014, increasing his income tax due for that tax year by £594,814.57 on the basis that the buy-back from him by a company, Computer Aided Design Ltd, of shares in the company, for £1.95m, was a distribution taxable for income tax under section 383 of the Income Tax (Trading and Other Income) Act 2005 and that the taxpayer was therefore liable for tax on the distribution under section 385(1)(b) of the 2005 Act as a person receiving or entitled to the distribution.
By a decision dated 23 November 2018 the First-Tier Tribunal (Tax Chamber) upheld the decision of the revenue. The taxpayer appealed on the ground that the transaction was a single composite transaction whose effect was to make the taxpayer the owner of one share in the company devoid of its distributable reserves, at a small net cost, and that for the purposes of section 383 and section 385(1)(b) of the 2005 Act viewed realistically, the persons who received and were entitled to the distribution were the selling shareholders from whom he had bought the shares, even though they no longer owned the shares.
By a decision promulgated on 14 January 2020 the Upper Tribunal (Tax and Chancery Chamber) (Upper Tribunal Judge Raghavan and Upper Tribual Judge Scott) [2020] UKUT 168 (TCC) dismissed the appeal, finding that Parliament had provided that the tax chargeable on any distribution was to be recovered from the actual recipient of the distribution or from another where the distribution was the income of that other person (on the basis that the other person was entitled to the distribution), that the taxpayer was the owner and seller of the shares at the time the purchase was made by the company; that the buy-back funds were actually paid to and received by him and that he was liable to pay the tax under section 383; and that the proceeds of the share buy-back were not to be regarded as belonging to the vendor shareholders and the vendor shareholders were entitled to £1.95m but that was in respect of the sale of their shares to the taxpayer, and not in respect of a distribution which by definition had to (and did) rest with the actual shareholder at the time.
By a notice of appeal filed on 17 August 2020 and pursuant to permission granted by the Court of Appeal (Nugee LJ) the taxpayer appealed on the grounds that: (1) the concept of “entitlement” had to be given a “wide practical meaning” which not only allowed but required the court to have regard to all transactions which were intended to have a commercial unity; (2) on the true construction of section 385(1)(b) it was insufficient to establish that a person was entitled to the distribution in the sense that he was the legal and equitable owner of the money once it fell due (though a bare legal...
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