When are Shares Issued for Tax Purposes

News - 24/11/2016

In Alberg v HMRC [2016] UKFTT (5 September 2016), the Tribunal found that shares had not been issued to the appellant, so that loss relief under ITA 2007 s 131 was not available to him. This resulted in additional income tax of £100,000.

Mr Alberg entered into a business venture with a partner, Mt Patel. The venture involved buying a specialist food snacks and drinks business in financial difficulties from a company in administration and then running the business.

The appellant and Mr Patel appointed a firm of solicitors to set up a company to acquire and run the business and to prepare the required legal documentation. The company was incorporated on 8 February 2008.

The appellant and Mr Patel were appointed directors on 12 February 2008. The appellant paid £250,000 into the company in two tranches: he transferred £200,000 to the solicitors on 12 February 2008 to fund the company’s acquisition of the business and on 14 February 2008 he transferred £50,000 to the company itself. In addition a Panamanian company (“Vagards”) associated with Mr Patel provided a loan facility to the company, secured by a debenture dated 17 March 2008.

The venture proved unsuccessful within a few months an in November 2008, Mr Patel told the appellant that Vagards were going to call in the debenture.

Insolvency practitioners were appointed as administrators of the company on 5 February 2009. Vagards were owed over £2 million as at that date. The appellant was not a creditor of the company which was eventually dissolved on 13 September 2011.

The key question in the case was whether the company issued shares to the appellant in consideration of the £250,000.

The tribunal relied upon the case of National Westminster Bank Plc v Inland Revenue Commissioners [1994] STC 580 for the meaning of issuance where Lord Templeman said (at p587):

“ In my opinion, shares are issued when an application has been followed by allotment and notification and completed by entry on the register. Once the shares have been issued, the shareholder is entitled to a share certificate.”

Later in his judgement (at p587) he said:

“ In the present case, in my opinion, the word ‘issue’ in the [Income and Corporation Taxes Act 1998] is appropriate to indicate the whole process whereby unissued shares were applied for, allotted and finally registered.”

The appellant was unable to produce a register of members of the company, share certificates relating to shares in the company held by the appellant or an annual return of the company with details of its shareholders.

In finding against the appellant the tribunal stated at para 56:

“ We understand that this may appear an inequitable outcome from the appellant’s perspective, given that he actually invested, and lost, £250,000. At the heart of this decision is the fact that, in enacting the provisions relating to share loss relief, Parliament specifically required that the shares in question be issued to the taxpayer; and the meaning of issuance was made clear by the House of Lords in National Westminster Bank. Thid Tribunal has no power to substitute its own view of an equitable outcome in the face of clear and prescriptive law.”

If you would like advice or assistance on any of the issues raised in this blog please contact Morrisons Solicitors tax litigation expert Sally Hutchings. Sally can be contacted by email at [email protected]  or by telephone 020 8971 1048.

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