Sidhu
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 March 2018 |
| Neutral Citation | [2018] UKFTT 137 (TC) |
| Date | 13 March 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0137 (TC)
Judge Christopher McNall, Mr Derek Robertson JP
Mr Brian Tanney FCA of B P Tanney & Co, Accountants, appeared for the appellant
Mr Dermot Ryder, an Officer of HMRC, appeared for the respondents
Capital gains tax – Appeal against closure notice issued pursuant to TMA 1970, s. 28A(1) and (2) – Whether relief under TCGA 1992, s. 24(2) was available – Whether the amount subscribed for shares was the issued shares and the balance of funds paid to the company a loan.
The First-tier Tribunal, dismissing the taxpayer's appeal, found the balance of funds paid to the company on an oversubscribed subscription for shares was, on the evidence, a loan.
The Notice of Appeal dated 2 March 2017 was out of time although HMRC indicated it did not object to the Tribunal thereby extending the time to appeal. The Appeal was against a closure notice which determined that tax of £10,078.80 was due for the year 2012/13. That decision was upheld by departmental review on 4 January 2017.
The Appellant submitted a self-assessment return for 2012/13 on 10 January 2014. The Capital Gains pages of that return showed total losses for the year of £28,051 (Box 6), losses against other income of £28,051 (Box 12), and total allowable costs of £28,051 (Box 24). An additional note was included explaining that 253 ordinary shares were subscribed for cost of £25,000 and 102 at £3,051.
The Appellant subscribed for shares in The Balmoral Clinic Limited, which was registered in Northern Ireland, on 12 December 2005 and 3 May 2006. Both share issues were oversubscribed by investors. The Company had traded since June 2006. The Annual Return, dated 18 December 2006, and certificated on 17 February 2007, recorded the Appellant as holding 2,855 shares as at 3 May 2006. On 4 April 2008 an administrator was appointed. The Statement of Affairs recorded the Appellant as owning 2,855 £1 shares and being a creditor in the sum of £25,695. The subsequent liquidation meant the Appellant had lost her investment.
Relief was claimed under TCGA 1992, s. 24(2) for the £28,051 and HMRC contended that the issued shares were for £2,855 and the balance of £25,695 was a loan. For the Appellant it was contended that HMRC should accept that £25,695 also qualified for loss relief because:
- The Company could not simply change the nature of original subscription (being that for shares and not a loan);
- There were no loan terms, and as such it bore the hallmarks of equity and could be a share premium; or alternatively it was suggested that
- the £28,051 was purchased goodwill on behalf of a partnership; or
- it was a trading loss.
The Tribunal said the key issue in the appeal was the juridical nature of the payments. It is noted that the Tribunal expressed the view that the grounds of appeal were an “an elaborate attempt to re-characterise, after the event, the actual transactions which the Appellant entered into.”
Regarding whether there was a loan, it was found that the balance of money was such because it was expressly described by the Company on several occasions. Evidence included two letters – December 2005 and May 2006, which referred to loans. Following the second letter, the Company issued an Unsecured Loan Note. Communications on 9 May 2007 by the Company solicitors referred to loan notes and shares. The Appellant had acquiesced in that treatment. There was no contrary evidence provided by the Appellant.
The Company's statement of affairs also confirmed the position.
The Tribunal found the proposition there must be some “fresh consideration” if the basic terms of a contract are to be changed was also wrong. The Appellant's argument was “that the moneys were not originally advanced as a loan, but to buy shares, and that the Company could not unilaterally change the way in which it treated the money” and sought to rely on Re McVeigh (a Bankrupt): The Official Receiver of Northern Ireland v Stranaghan [2010] NICh 8. The Tribunal noted the striking difference between that case and the particular circumstances under consideration and stated, “We simply do not discern any factual or legal similarity to the appeal which is before us.”
The Appellant also argued that “it is only necessary that shares have been subscribed for. It is not a requirement to subscribe for “the” i.e. specific numbered shares”. The Tribunal did not consider that to be an accurate interpretation of ITA 2007, s. 135. Furthermore, it found unequivocal evidence there was a loan.
Regarding whether the payment was a share premium, the Tribunal found the payment was a loan. Similarly, the arguments there was a capital contribution, trading loss, or a purchase of goodwill, were rejected.
The decision is an interesting read, not only because of the nature of the arguments in light of the evidence to the contrary but because the judgement explores those arguments in detail. It is a wonder why the case was appealed as it appears to have been unlikely at any point to have been successful.
[1] This appeal was made by way of a Notice of Appeal dated 2 March 2017. The Notice of Appeal was out of time, but HMRC indicated at the hearing that it did not object to the Tribunal, of its own initiative, extending the time for appealing. We do so accordingly.
[2] The Appeal is brought against a closure notice issued on 30 September 2016 pursuant to sections 28A(1) and (2) of the Taxes Management Act 1970 which determined that tax of £10,078.80 was due for the year 2012/13. That decision was upheld by departmental review on 4 January 2017.
[3] On 10 January 2014, Dr Sidhu submitted a self-assessment return for the year 2012/13. The Capital Gains pages of that return showed total losses for the year of £28,051 (Box 6), losses against other income of £28,051 (Box 12), and total allowable costs of £28,051 (Box 24).
[4] The return included the following additional notes, explaining the £28,051:
253 ordinary shares subscribed for cash 1 December 2005 – Cost £25,000
102 ordinary shares subscribed for cash 3 May 2006 – Cost £3,051
[5] The Grounds of Appeal, in full, are as follows:
- Client subscribed £28051 for shares in Balmoral Clinic Ltd (BCL) and claimed relief under s24(2)Taxation of Chargeable Gains Act 1992. BCL issued shares for £2855 and informed client balance of £25695 was a loan. HMRC decision not to accept that the £25695 qualifies for loss relief is wrong for following reasons:
- In the absence of fresh consideration, BCL, now in liquidation, could not simply change the nature of original subscription (as confirmed in Official Receiver of Northern Ireland v Stranaghan [2010] NICh 8, Hart J). The case was not accepted by HMRC because it was not a UK case;
- loan terms i.e. interest free – no fixed redemption date – unsecured, bear hallmarks of equity, perhaps a share premium, rather than a loan;
- Alternatively the £28051 was purchased goodwill on behalf of a partnership between client, who has a private practice (conducted through her 100% owned company) and her consultant husband who also has a private practice;
- Alternatively, the £28051 is a trading loss as the expenditure was incurred in order to reduce costs by consolidating the two practices at one location rather than the many sites then in use.
[6] In summary, HMRC's position is that only £2,855 was subscribed for shares and that share loss relief was available on £2,855. HMRC's position is that the balance (£25,695) represented a loan to the Company, and as such was outside the scope of section 24 TCGA 1992.
[7] The arithmetic of the figures – as between the Company's records, the return, and the public record of shareholdings – does not fully reconcile. We have been unable to resolve certain arithmetic discrepancies. But the discrepancies are minor and do not stand in the way of us deciding this appeal.
[8] Section 24 of the Taxation of Chargeable Gains Act 1992 deals with “Disposals where assets lost or destroyed, or become of negligible value.”Section 24(1) deals with the situation where an asset has been entirely lost, destroyed, dissipated, or has become extinct. Section 24(2) deals which the situation where “a negligible value claim is made”. In principle, section 24 can apply to the situation where shares have been purchased in a company which enters liquidation such that the value of those shares is negligible.
[9] Section 131 of the Income Tax Act 2007 relates to “Share Loss...
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