RKW Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 January 2014 |
| Neutral Citation | [2014] UKFTT 151 (TC) |
| Date | 30 January 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 151 (TC)
Judge Michael S Connell; Dr Caroline J Small.
Ms Felicity Cullen QC for the Appellant
Mr Luke Connell, Officer of HM Revenue and Customs, for the Respondents
Corporation tax - Deemed charge under ICTA 1988, section 419s. 419 on loan to participator - Investment in close company - Shareholder agreement - Subscription for shares payable by instalments - Instalments not paid - Whether loan to participator - No - Appeal allowed.
The FTT has found that an amount owing to a company in respect of share capital paid for in instalments did not give rise to a tax charge for the company under ICTA 1988, s. 419 (now section 455CTA 2010, s. 455).
On 20 November 2000, Mr John Gray subscribed for shares in RKW Ltd (the Appellant), agreeing to pay for them in four instalments with the first instalment due a year later. Prior to 20 November 2000, Mr Gray had had no connection with the Appellant, nor with any of its shareholders. The Appellant was a close company as defined in ICTA 1988, s. 414 (since rewritten as section 439CTA 2010, ss. 439-445) at all material times. HMRC issued a discovery settlement in respect of the Appellant's accounting period ended 31 December 2000 on the basis that a liability arose under ICTA 1988, s. 419 (since rewritten as section 455CTA 2010, s. 455) in respect of the unpaid share capital. The Appellant appealed and it fell to the First-tier Tribunal to determine whether any liability to tax under s. 419 had been incurred by the Appellant.
The Appellant's case was that s. 419 could apply only if: (1) by subscribing for the shares on the terms set out above, Mr Gray had incurred a debt to the Appellant for the purposes of s. 419; and (2) Mr Gray was a participator in the Appellant at the time at which that debt was incurred by him. The Appellant's position on these points was set out as follows:
Argument A. The term "debt" as used in s. 419(2)(a) (now section 455 subsec-or-para 4CTA 2010, s. 455(4)) did not extend to a liability to pay the price for shares by instalments on future dates.
Argument B. Alternatively, and as a matter of company law, when shares are issued for a subscription price which is payable in instalments, no debt arises until an instalment becomes due.
Argument C. Even if an agreement to subscribe for shares for a price payable by instalments gives rise to a debt at the date of the agreement, Mr Gray was not a participator in the Appellant at the time at which the debt was incurred; he became a participator as a result of subscribing for the shares.
HMRC's (the Respondent's) case was that a subscriber incurs a debt to an issuing company where the shares are allotted fully paid and called up, and the subscription price is not paid immediately on allotment.
The First-tier Tribunal found in favour of the Appellant with regard to Argument A and Argument C, allowing its appeal against the discovery assessment. The liability of Mr Gray was a liability to honour an investment promise; it was not a liability to repay monies borrowed or owed and so it was not a debt within the context of s. 419. Further, for a liability to have arisen under s. 419 Mr Gray would have had to have been a participator in the Appellant prior to the time the Appellant was regarded as having made a loan to him. This was not the case here as Mr Gray did not become a participator until he had subscribed for shares in the Appellant. The purpose of s. 419 is to impose a charge to tax where profits, assets or value are extracted from a close company without charge to tax. In this case, there was no extraction of profits, assets or value.
In this case, shares issued by a company to a new investor were to be paid for in instalments. HMRC sought to tax the company under what is now section 455CTA 2010, s. 455 on the amounts owed to it by the investor. Taking a purposive approach, the First-tier Tribunal found in favour of the taxpayer. section 455Section 455 is designed to impose a charge to tax where profits, assets or value are extracted from a company without a charge to tax. There was no such extraction here and so section 455s. 455 should not apply: "it [what is now Corporation Tax Act 2010 section 455s. 455] is not designed to penalise, discourage or distort investment in close companies and should not be construed so as to apply to the making of an investment".
[1]This is an appeal by RKW Ltd ("the Appellant") against a discovery assessment of 542,525.50 in respect of its accounting period ending 31 December 2000 on the basis that a liability arose under s419 ICTA 1988 (loans to participators) in respect of unpaid share capital of 2,170,102, where the subscription price for shares in a close company was payable by instalments.
[2]The Tribunal is required to decide only whether in principle any liability to tax under section 419s419 ICTA 1988 has been incurred by the Appellant. The amount in issue is not before the Tribunal.
[3]The documentation before the Tribunal comprised a joint list of agreed documents, relevant legislation and authorities, together with an agreed statement of facts. There was no witness evidence. The agreed facts are stated in paragraphs 4 to 27 below.
[4]On 28 August 1998 the Appellant was incorporated (as Toneformat Limited) with an issued share capital of two ordinary shares.
[5]The Appellant Company's registration number is 3623235 and, until about October 1998, its shareholders were Instant Companies Ltd and Swift Incorporations Limited. From about October 1998, the directors of the Appellant were Mr P J and Mrs P A Whitehouse, Mrs A I Richardson, Mrs BT Keen and Mrs H Thomas. Mr D L Hay was company secretary.
[6]On 8 October 1998, the Appellant's name was changed to RKW Limited. The first financial statements prepared covered the period 28 August 1998 to 27 February 2000, and indicate that the Appellant commenced trading on 16 February 1999.
[7]The Appellant's principle activities were the provision of authentic table dancing and cafes.
[8]By November 1999 a number of individual shareholders, most of who are members of the Richardson family, had subscribed for ordinary one pound shares in the Appellant.
[9]One of the shareholders, Mr G Richardson, died on 27 May 2006.
[10]The identities of the shareholders and the size of their respective shareholdings in the Appellant in the early part of 2000 (as set out in the Appellant's annual return form 363a filed on 14 November 2000) were as follows:
Mr G Richardson |
1 ordinary shares |
1,616,225 |
Mrs A Richardson |
1 ordinary shares |
1,616,225 |
Mr P Whitehouse |
1 ordinary shares |
252,048 |
Mrs H Thomas |
1 ordinary shares |
9,000 |
Mr B Keane |
1 ordinary shares |
331,652 |
Mr A Richardson |
1 ordinary shares |
528,097 |
Mrs P Whitehouse |
1 ordinary shares |
252,049 |
Trustees for minor children of the above shareholders |
1 ordinary shares |
15,000 (3 x 5000) |
[11]All of the above shareholders ("the Richardson Shareholders") were understood to be directors of the Appellant
[12]During 2000 the directors of the Appellant identified a potential new investor who had extensive knowledge and experience of the Appellant's field of business. This investor was Mr John Gray ("JG"). It is agreed for the purposes of this case that JG is a US citizen who is (and was at all material times) resident in California. It is further agreed for the purposes of this case that none of the Richardson shareholders was at any time prior to conclusion of the agreement referred to in paragraph 16 below connected with JG.
[13]Following discussions between the contracting parties, terms on which JG would subscribe for shares in the Appellant were agreed in principle. These terms were recorded in an agreement dated 20 November 2000 between JG, the Appellant and the existing shareholders in the Appellant ("the Shareholders Agreement").
[14]All dealings relating to the negotiation and conclusion of the Shareholders Agreement took place on arm's length terms.
[15]The copy of the Shareholders Agreement, which is available before the Tribunal has not been signed by the Appellant and JG. It is however agreed that a copy of the Shareholders Agreement was signed by those parties on or about 20 November 2000 and that the Shareholders Agreement did take effect and became binding on all of the parties to it following signature by the last to sign.
[16]Under the terms of the Shareholders Agreement, the existing shares in the Appellant held by the Richardson shareholders were to be designated as "A ordinary shares" and JG was to subscribe for 4,808,880 "B ordinary shares".
[17]The B ordinary shares would carry equal voting rights to the A ordinary shares and, given the relative numbers of A ordinary shares and B ordinary shares, would give JG voting control of the Appellant (clauses 21 - 23 of the Shareholders Agreement).
[18]Clause 20 of the Shareholders Agreement provided that the B ordinary shares were issued for a subscription price (calculated by reference to par value) in cash as follows:
20) JG shall subscribe for the B ordinary shares for cash at par and shall pay for that subscription in the manner and on the dates set out in schedule 4. The B ordinary shares shall be fully unconditionally and irrevocably issued in consideration of the agreement of payments herein and as detailed herein within schedule 4. Said agreement of payments is considered by the parties hereto, and each of them, that the same represents valuable consideration to each of them. The share to JG shall irrevocably be issued to JG immediately upon the signing hereof by the parties hereto. [Withstanding anything to the contrary contained herein, inclusive of all attachments hereto, the parties hereto, and each of them, agree that JG is hereby acquiring a full 51% majority ownership in the company.]
The parties hereto, and each of them, further agree that they desire JG to become involved as JG retains extensive table dancing related experience...
To continue reading
Request your trial
-
Sidhu
...and unlike in this case, the draft accounts showed the existence of a share premium. [52] The Appellant also seeks to rely on RKW Ltd [2014] TC 03289. That case does not bind us. Nor do we find it of much assistance. It dealt with different legislation, and the meaning of loan within sectio......